10 terms

throughput accounting (TA)

-aims to make best use of a scarce resource (bottleneck) in a JIT environment
sales reve. - direct material cost
this is a measure of profitability
purpose of TA
-maximise throughput while simultaneously reducing op. expense and inventory
-1st we determine what factor prevent the throughput from being higher (identify the bottleneck i.e. no of machine hours or labour hours)
best solution to manage the bottleneck in short term. in long term the bottleneck should be eliminated.
Main assumptions when using TA
-only raw material bought from external suppliers is variable cost
-Labour cost not variable in short term
-so based on these assumptions throughput is the same as contribution
Theory of constraints (TOC) 5 steps
1. Identify scarce resource
2. Decide how to maximise the throughput
3. make as much of the most lucrative product (highest throughput) (optimum mix)
4. remove the bottleneck in long term
5. new bottle neck - go back to step 1
when one bottleneck is eleviated it may be replaced with a new bottleneck elsewhere in the system.
1. Throughput (return) per unit of bottleneck resource = throughput per unit/hours per unit of bottleneck resource.
2. cost per unit of bottleneck resource = total factory cost/total bottleneck resource time available
TPAR = 1/2
Total factory cost - fixed cost + Labour cost - also called operating expense
Interpretation of TPAR
TPAR > 1
throughput exceeds the op. cost - product should make profit.
Priority should be given to products generating best ratios
TPAR < 1
throughput is lower that op. expenses resulting in a loss.
Decision making in a Throughput Accounting environment:
Same factory/division - rank as per the return per hour figure - operating cost are the same.
different divisions - rank as per the TPAR figures. Operating cost might be different
Criticism of TPAR
Is based only on short term decisions
Long term view should be taken before rejecting a product with TPAR < 1
In long term ABC approach is more appropriate for measuring and controlling performance.
How to improve the TPAR
-Increase sales price
-Reduce material cost
-reduce operating cost to reduce the cost for factory hour
-improve productivity of bottleneck (reducing time required to make each unit of product in a bottleneck machine)
Multi Product decision making
Objective - maximise profit
Fixed cost are un effected by the production decision in the short run - maximise the throughput earned
1. identify the bottleneck
2. calculate the throughput for unit per each product.
3. calculate the throughput per unit of the bottleneck resource pro each product ( numerator of TPAR)
4.Rank the product as per calculations in 3
5. allocate resource using the ranking in 5