Throughput Accounting
Throughput Accounting
‘A technique where the primary goal is to maximize throughput while simultaneously maintaining or
decreasing inventory and operating costs.’ CIMA Official Terminology 2005
CONCEPT
In the short run, all costs in the factory are likely to be fixed with the exception of materials costs
In a JIT environment then we should be attempting to eliminate inventories. Use of a limited resource in
production of inventories should be avoided and therefore any work-in-progress should be valued at
only the material cost
FORMALS
The TA ratio should be greater than 1 if a product is to be viable. Priority should be given to those
products which generate the highest TA ratios.
EXAMPLE 02
Question 02
Product X is made in a production process where machine time is a bottleneck resource.
One unit of Product X requires 0.1 machine hours.
The costs and selling price of Product X are as follows:
$ $ $
Materials 6 Labour (0.25 hours) 3 Other factory costs 5
Sales price 15
In a system of throughput accounting, what is the return per factory hour?
A $90. B $60 C $10 D $4
Question 03
MN manufactures automated industrial trolleys, known as TRLs.
Each TRL sells for $2,000 and the material cost per unit is $800.
There is no limit to sales demand.
Costs next year will be $264,000 for factory labour, $834,000 for production overheads, and
$265,000 for marketing and administrative costs.
The trolleys are made on two different machines.
Machine X can produce the parts for 40 TRLs each week but it is old and unreliable and it breaks
down from time to time. It is estimated that on average 15% of production time on this machine is
lost. Machine Z, which is reasonably reliable, can process and assemble 30 TRLs per week.
The company has recently introduced a just-in-time (JIT) system and it is company policy to hold
little work-in-progress and no finished goods inventory from week to week.
The company operates a 40-hour week, 48 weeks a year.
Required The throughput accounting ratio for the key resource for an average hour next year will be:
A 1.078 B 1.268 C 1.338 D 1.574.
Question 04
The following statements have been made about throughput accounting.
(1) When throughput accounting (TA) is used, the aim should be to have sufficient inventories to
overcome bottlenecks in production.
(2) Throughput accounting is based on the assumption that in the short run, most factory costs,
other than materials, are fixed.
Which of the above statements is/are true?
A 1 only B 2 only. C Neither 1 nor 2 D Both 1
and 2
Question 06
In the theory of constraints and throughput accounting, which of the following methods may be
used to elevate the performance of a binding constraint?
(1) Acquire more of the resource that is the binding constraint.
(2) Improve the efficiency of usage of the resource that is the binding constraint.
A 1 only B 2 only C 1 and 2. D Neither 1 nor 2
Question 07
8 The following statements have been made about throughput accounting and the theory of
constraints. (1) When an existing bottleneck is overcome (‘elevated’), a new bottleneck will appear.
(2) In any commercial organization, it should be expected that the throughput accounting ratio for
any product will exceed 1.
Which of the above statements is/are true?
A 1 only B 2 only C Neither 1 nor 2 D Both 1 and 2.
Question 08
A manufacturing company uses throughput accounting. It has identified Labour Grade A as its
bottleneck resource.
Which one of the following measures might enable the company to improve its total throughput?
(1) Reduce the selling prices of some products in order to increase sales demand.
(2) Improve the efficiency of machine usage by cutting down wastage.
(3) Pay Grade A labour overtime at a premium of $4 per hour in order to work additional hours.
Question 09
One of the products manufactured by a company is Product X, which sells for $40 per unit and has a
material cost of $10 per unit and a direct labour cost of $7 per unit.
The total direct labour budget for the year is 50,000 hours of labour time at a cost of $12 per hour.
Factory overheads are $2,920,000 per year. The company is considering the introduction of a system
of throughput accounting. It has identified that machine time as the bottleneck in production.
Product X needs 0.01 hours of machine time per unit produced.
The maximum capacity for machine time is 4,000 hours per year.
What is the throughput accounting ratio for Product X?
A $3.41. B $2.80 C $2.10 D $1.90
Question 10
Budget information relating to a company that manufactures four products is as follows.