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
STEPS OF THROUGHPUT ACCOUNTING

Identify the system constraint
Is the constraint internal, for example, in production, engineering or planning? Is it external, for
example, in the market? Is it a resource or is it a policy?
Decide how to maximize the output from the constraint

Prepare to subordinate all other activities to this decision. Non-constraints must be subordinate to
the needs of the constraint. Once the resource constraint has been identified, consideration can be
given to deploying the appropriate level of resources. As a consequence, the constraint's capacity is increased.
Identified policy constraints can be more easily eliminated

Once a constraint has been rectified, go back to step one to identify the next most serious constraint
and repeat.
TOC and TA detractors' summary of criticisms Specific

Criticisms have been levelled at TOC and TA and are discussed below:
 They are short-term decision tools.
 They may only be valid concepts if applied to the totality of the supply chain including
management, production, resources and support.
 Dependent on circumstances, operating expenses under TOC/TA are regarded as fixed,
which is simplistic in the view of detractors. Therefore TOC and TA are basically the same
thing as variable costing.
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.
Compiled by: Mohammad Faizan Farooq

Contact: farooqtola@gmail.com
EXAMPLE 01
EXAMPLE 02

Question 01
When machine time is a binding constraint on production output, which one of the following will
have no effect on the throughput accounting ratio for a product that the machine is used to
manufacture?
A Obtaining a lower purchase price for materials for the product
B Reducing factory costs
C Reducing the machine time per unit to make the product.
D Increasing the selling price of the product
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 05
Product Z is made in a production process where machine time is a bottleneck resource.
One unit of Product X requires 0.3 machine hours. The costs and selling price of Product X are as
follows:
$ $ $
Materials 8 Labour (0.4 hours) 4 Other factory costs 2
Sales price 18
In a system of throughput accounting, what is the throughput accounting ratio for Product Z?
A 1.29 B 1.67. C 3.00 D 4.00
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.
A Measure 1 B Measure 2 C Measure 3.

D None of the measures will increase throughput
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

Bottleneck Resource
In practice, it is likely that a product will have to be worked on by several machines - one after the
other. The rate of production will be restricted by the slowest of the machines, and this machine is
known as the bottleneck resource. The calculations that we have been through in the earlier
examples will be performed using the hours per unit in this bottleneck resource
Question 10
Budget information relating to a company that manufactures four products is as follows.
Only 750 machine hours are available during the period.

Applying the principles of throughput accounting, how many units of Product B should be made if
the company produces output to maximize throughput and profit?
A 0 units B 250. units C 375 units D 500 units


Throughput Accounting

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THROUGHPUT ACCOUNTING

STEPS OF THROUGHPUT ACCOUNTING

Decide how to maximize the output from the constraint

Identified policy constraints can be more easily eliminated

TOC and TA detractors' summary of criticisms Specific

Compiled by: Mohammad Faizan Farooq

Compiled by: Mohammad Faizan Farooq

Compiled by: Mohammad Faizan Farooq

A Measure 1 B Measure 2 C Measure 3.

Compiled by: Mohammad Faizan Farooq

Only 750 machine hours are available during the period.

Compiled by: Mohammad Faizan Farooq

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