Throughput accounting

1
Throughput accounting

• Definition
• Underlying ideas / concepts
• Bottleneck resources
• Throughput Measures
• Interpreting measures
• Benefits of TA
• Application in other sectors

2
Definition

• A management accounting system which focuses on
  ways by which the maximum return per unit of
  bottleneck activity can be achieved. CIMA OT
• TA is therefore a development of TOC
• TA emphasises
• Throughput
• Inventory Minimisation (thus link with JIT)
• Cost control

3
Underlying ideas

• Only materials costs are variable in short term
• As inventory should be nil, idle capacity may be
  acceptable (but not for bottleneck)
• Profit is earned when goods are sold, thus
  inventory is valued at material cost only

4
Bottleneck resources

• If bottlenecks cannot be eliminated, volume is
  limited to the bottleneck capacity
• This minimises WIP
• Eliminating one bottleneck creates another
• Primary concern is managing bottlenecks
• Bonuses paid or improved efficiency in
  non-bottleneck processes is wasted
• Bottlenecks may not be the only problem

5
Measures

• Machine utilisation
• if machine capacity is resource constraint, the
  bottleneck can be identified by this
• machine hours to meet sales demand
• machine hours available
• Highest rate bottleneck
• Cover page 140, and reveal example 2.6

6
Throughput measures

• Return per time period
• sales revenue material cost
• time period
• indicates value added in a period
• encourages removal of bottleneck

7
Throughput measures

• Return per time period on bottleneck resource
• sales price material cost
• minutes of bottleneck resource
• Used to rank products to optimise short term
  production
• Similar to utilisation of limiting factor
• As bottlenecks change, ranking may change
• Also other factors must be considered

8
Throughput measures

• Throughput accounting ratio (T/A Ratio)
• throughput contribution per time period
• conversion cost per time period
• Includes factory running costs
• Requires factory costs to be allocated to
  products
• Profitable ratio gt 1
• Higher ratio higher profitability
• See example on pg 142

9
Throughput measures

• Effectiveness ratio
• standard minutes of throughput achieved
• minutes available
• More relevant as staff should work to produce
  inventory, thus traditional variances are
  unsuitable

10
Interpreting Measures

• By treating only material as variable cost, TA
  may be seen as too short term
• Focus is on maximising throughput, not profit
• While profit will often follow throughput,
  production may be above profit maximising output
  level (eg as market demand may be less)

11
Benefits of TA

• Directs attention to bottlenecks
• Highlights key elements of profit
• Reduces inventory and associated costs
• Speeds up response to customer demand
• Smoothes production flow
• Focus is on effectiveness, not efficiency
• See examples on pp 144 to 147 of text

12
Application to other sectors

• Retailing has long since focused on sales value
  and cash generation
• Support activities often the bottleneck
• eg despatch / order processing
• Utilisation of high grade staff for lower level
  tasks
• eg dentist / hygienist