Throughout Accounting Flashcards
What is throughput accounting?
An approach to accounting, in line with JIT, which assumes management has a given set of resources available. Profit is maximised by managing purchased material and parts.
What are the 3 concepts throughput accounting is based on?
1.Throughput
The only cost deemed to relate to the volume of output is direct material cost
All other costs are fixed
Throughput = revenue – totally variable costs
Throughput = revenue – raw material costs
2.Inventory minimisation
All the money the business invests to buy the things that it intends to sell, or all the money tied up in assets
Includes: unused raw materials, work-in-progress, unsold finished goods
Ideal inventory is zero
3.Cost control - Operating expenses
All the money a business spends to produce the throughput
What are the two methods of calculating throughput?
Throughput = revenue – totally variable costs Throughput = revenue – raw material costs
What does the profit reporting look like for throughput accounting?
Profit: Revenue x \+ Opening Stock x Raw material costs x - Closing stock (x) (x) Throughput x Operating expenses (x) Net profit x
What did Emerged challenge by starting throughput accounting?
Direct labour costs not wholly variable
Fixed costs less “fixed” that they were in past
The only truely variable cost is materials
What did Goldratt view throughput accounting as?
The goal of a business is to make profit
To increase profit need to increase throughput, decrease operating expenses and reduce inventory
Key constraints in business likely to be customer demand and physical constraints limiting output
Profitability not linked to products but to the whole system
What is maximising throughput?
If company has more capacity than demand it should produce to meet demand in full
If the business has a constraint then it should make the most profitable use that it can of the constraining resource
The constraint is called a bottleneck
The aim is to identify bottlenecks and remove them if possible
What are the steps to multi-product decision making?
Step 1 – identify the bottleneck constraint
Step 2 – calculate the throughput per unit for each product
Step 3 – calculate the throughput per unit of the bottleneck resource for each product
Step 4 – rank the products in order of the throughput per unit of the bottleneck resource
Step 5 – allocate resources using this ranking
What are some the constraint on throughput accounting?
Inadequately trained sales force Poor reputation for meeting delivery dates Poor distribution system Unreliability of material supplies Insufficient production capacity
How do you calculate return per time period using throughput accounting?
Throughput / products time on bottleneck resource
How do you calculate cost per time period using throughput accounting?
Total factory cost / total time on bottleneck resources
How do you calculate the throughput accounting ratio?
return per time period / cost per time period
What are the criticisms of throughput accounting?
Concentrates on the short term, when business has fixed supply of resources and operating expenses are fixed
Concentrate of material cost and does not control other costs
More appropriate to use e.g. abc for measuring and controlling performance in the long term
What is a digital product and why are the difficult to cost?
A digital product is a product that is stored, delivered and consumed in an electronic format
They can, by their very nature, be difficult to cost:
Marginal cost can be 0. Most costs are fixed.
Often expensive to produce but cheap to reproduce
No standard cost or time can be attributed
Drivers for overhead can be difficult to determine
Timing of costs can be difficult to plan
Lifespan of digital product can vary greatly
Many features or functions of product might be shared amongst a number of products
What is decision making for digital products like?
Many complications because of nature of products
Timing and frequency of costs difficult to estimate
Costs for shared functions difficult to determine
Unknown life spans
Therefore many of the traditional decision making techniques don’t apply to digital products
