The following are definitions given for 1) Inventory and 2) Operating Expense in the Throughput Accounting ARticle. I understand the inventory definition, although I think the cost of raw materials should be added to it since it is usually such a huge part of inventory cost. However, I do not agree with the statement that > "OE is variable cost in the strictest sense; raw materials and components that go into a product is the best example." < OE, per the definition given below, should include selling and administration expenses required to move the Inventory out of warehouses and convert it into Throughput - NOT the costs to CREATE the inventory. The costs to CREATE the inventory should be Inventory costs. There may be some variable expenses involved here but there are also a lot of fixed managerial salaries, and publicity expenses involved in converting inventory into throughput. It would seem to me that the expesnes that are variable expenses "in the strictest sense" (to quote the article) are rather inventory costs.
EXCERPT FROM ARTICLE: Inventory (I) is the money the system has invested in things it intends to sell, money which it cannot use for another purpose until then. In addition to conventional fixed costs like buildings and machinery, electricity, labor, adhesives, lubricants, and many other items that usually count as variable costs are part of Inventory.
Operating Expense (OE) is the money the system spends to convert inventory into throughput. OE is variable cost in the strictest sense; raw materials and components that go into a product is the best example.
18.104.22.168 16:37, 17 April 2007 (UTC)DB The theory is that you don't nessecarily eliminate bottlenecks but you manage them better and understand that they are what determines your throughput weather it be an external bottleneck or an internal bottleneck.
The theory states that variable Inventory costs are only Raw materials and all other costs are truly fixed until you reach a tipping point at which time direct labour becomes variable unless you are paying piece work for example if you produce one less widget your payroll does not decrease by the amount that widget would have cost you in labour. Therfore the labour or any other costs required to convert inventory into throughput is an Operating Expense and is a fixed cost. a good resource is "The Measurement Nightmare" by Debra Smith or "The Goal" by Goldratt