Chapter 5 - Throughout Accounting Flashcards
What is throughput accounting
Throughput accounting is where we have several products in production and there are limited resources available and we need to work out how best to use those resources
Throughput accounting is the more modern way to approach the situation whereas key factor analysis is the more traditional way
What is the main difference between throughput accounting and key factor analysis
Throughput accounting looks at materials only wear as key factor analysis looks at contribution which is selling price less variable costs. Need to consider fixed price in the workings
What are the two ways to calculate the contribution
Sales less variable costs
Profit before fix costs
How to calculate the fixed costs
If the total fix costs are given in the answer use that. However if it has been absorbed and we only have the per unit price then we assume the original cost things were done before knowing about the limitation. Therefore during the budget we would’ve produced to equal demand
How to calculate total factory costs for throughput
All production costs except materials
Return per factory hour
Throughput / Time on key resource
For example if throughput (contribution) is $17 and it takes two hours to make the product Then the return per factory hour is $8.50
Cost per factory hour
Total factory cost / Total time available on key resource
For example if we are told that for product a labour is Five dollars other variable costs $7 and fix costs is $3 and for product b Labour is $2 for the variable costs $2 and fix costs $2 and for product a maximum demand is 20,000 and for product b maximum demand is 10,000 then the total factory costs would be $360,000 ($15 x 20,000 hrs + $6 x 10,000) / total available time of 48,000 = cost per factory hour of $7.50 ( cost of running the factory per hour)
Throughput accounting ratio
Return per factory hour / Cost per factory hour
What is the purpose for the throughput accounting ratio
To see which product you shared manufacture first with the limited resource emoji with a higher throughput accounting total
Understand What’s the cost will be per factory hour so that you can ensure selling price exceeds this. > 1
Help to work out where you need to make alterations to improve the ratio, increase selling price, reduce factory costs, perhaps work faster so that a throughput of £18 that takes 2 hours which would give a return per factory hour of £9 could we make it in 2 hour this giving a return of £18 ? Etc
What is the bottleneck resource
The bottleneck resource in practice is likely to be a product that will have been worked on by several machines and the rate of production will be restricted by the slowest machines. For example if we were to make desks and build 50 desks per day and paints 100 desks per day then we would be restricted to 50 desks per day
Also note that with these questions it will give the capacity of production and not how much they are actually producing
In bottleneck resource when trying to identify the throughput which do you pick
The slowest process
How to work out the total cost if the units per hour is given as a fraction
Divide by the fraction
For example if the contribution is £30 and we can make 0.5 Units per hour then the answer is 30/0.5 = 60
Are all resources Limited resources in throughput accounting
Only machine hours are limited resource
