Ch10 Relevant information for short-term decisions

Question 1

Theory of constraints (bottlenecks)
- three measures

Answer 1

1. throughput contribution
   - revenue - DM (when finished goods are sold)
2. investments
   costs required to convert raw inventory into finished goods
3. operating costs
   all operating costs outside of DM (both product and period) incurred to achieve throughput contribution

Question 2

Throughput costing

Answer 2

Product sold: Sales - DM

Product not sold: increase in investment, only DM recorded to product.

Question 3

Five steps to maximize throughput contribution

Answer 3

1. identify the bottleneck in the operation
2. identify options for exploiting the bottleneck that is limiting capacity
3. subordinate all other processes without constraints in favour of the bottlenecked part of the process, using the bottleneck to set the production needs for the overall plant
4. work to remove the bottleneck in order to increase the throughput contribution less the incremental costs related to the improvements
5. repeat the process with the next bottleneck