Throughput Accounting

Question 1

Define throughput…

Answer 1

… turn materials into sales as quickly as possible

Question 2

Define bottleneck…

Answer 2

… any resource whose capacity limits the throughput of the whole production process

Question 3

Optimised production technology- OTP (Goldrat + Cox 1984)

Answer 3

• profits are expanded by increasing the throughput of the production plant
• the OPT approach determines what prevents throughput being higher by destingusining between bottleneck and non-bottleneck resources
• aim is to identify bottlenecks and to remove them/ensure they are fully utilised
• non bottleneck resource should be operated based on constant within the system

Question 4

Theory of constraints

Answer 4

… process of maximising operating profit when faced with bottleneck and non bottleneck operations

Question 5

5 key steps:

Answer 5

1. Identify the bottlenecks that restrict output
2. Decide how to exploit the bottleneck (optimum mix of products made by each bottleneck resource)
3. Subordinate everything else to the decision in step 2 and ensure work in progress minimised
4. Evaluate the systems bottlenecks and remove constraints
5. Go back to step 1 (continuous improvement)

Question 6

3 key performance measures used to apply theory of constraint

Answer 6

1. Throughput contribution (sales - direct materials)= the rate at which the system generates profit through sales
2. Investments (inventory)= the sum of inventories, research and development costs and the cost of equipment and buildings
3. Other operational expenses (factory costs)= all operating costs (other than direct materials) incurred to earn throughput contribution

Question 7

Principle concepts

Answer 7

-in the short run all costs except materials are fixed
-the ideal inventory is zero. Therefore, idle capacity in some operations must be accepted.
-WIP is valued at material cost only

Question 8

Advantages of throughput accounting

Answer 8

-> avoids the accumulation of excess stock and work in progress
-> delivers optimal production plan for an organism

Question 9

Disadvantages of throughput accounting

Answer 9

-> short term decisions focus
-> only valid if applied to whole supply chain
-> operating expenses may not be fixed
-> questionable whether TA provides an advantage in complex and changing environments

Question 10

Explain how a company could improve the throughput accounting ratio

Answer 10

1. Reduce bottleneck
2. Increase selling price
3. Cheaper materials
4. Reduce conversion costs (factory costs)

Question 11

Explain throughput accounting

Answer 11

-> helps companies to increase profit by improving manufacturing throughput, remove bottlenecks, and reach maximum capacity

Question 12

What is the throughput accounting ratio used for

Answer 12

-> used to rank products according to their profitability