Question

discuss the different assumptions used in product cost analysis and product throughput analysis. explain under what condition product cost analysis is preferred

Answer 1

Product cost analysis is the total cost observed by a company which includes the cost of production of the product manufactured and the cost incurred in selling the product. More simply the costs can be classified as direct cost and indirect cost. In direct cost, the following costs are included: cost related to product service delivery, salaries, costs of raw materials, among other things.

Indirect costs associated with product cost include overhead costs such as administrative cost, rent, utilities cost, marketing costs, fuel costs etc.

In case of throughput cost analysis, the main focus should be at the investment decisions in terms of its impact on holistic basis rather than at just one specific area. In this form of analysis, the focus is on the manner of process and production of the goods rather than at the goods. Concepts such as JIT, Lean process management and others are focused upon.

The 3 main aspects of throughput analysis are as follows:

1. Throughput: this is your revenue minus expenses, specifically all variable expenses. Since only few cost items are considered truly variable, the throughput as percentage of revenue from operation is usually high.

2. Operating expenses: this takes into account all the total fixed cost incurred. It includes items such as cost of raw materials, utilities, rent salaries etc. These costs are the ones that required for maintaining the minimum production level of the good

3. Investment: the total capex done in the plant/ manufacturing site to increase capacity and bring economies of scale into the picture