Throughput Accounting

Question 1

What is throughput accounting?

Answer 1

Throughput accounting is very similar to marginal costing, but it can be used to make longer-term decisions about capacity/production equipment

Question 2

What are the 3 concepts of throughput accounting?

Answer 2

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 (or investment)
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

3. Operating expenses
   All the money a business spends to produce the throughput

Question 3

What is the profit reporting proforma(Throughput)?

Answer 3

Revenue x
Raw material costs (x)
Throughput x
Operating expenses (x)
Net profit x

Question 4

How do you maximise throughput?

Answer 4

Aim is to maximise throughput
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 remove bottlenecks if possible

Question 5

What are the steps of multi product decision making?

Answer 5

To maximise profit and therefore throughput earned:
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

Question 6

What are the throughput accounting measures?

Answer 6

Return per factory hour = Throughput / Product’s time on bottleneck resource

Cost per factory hour = Total factory cost / Total time on bottleneck resource

Throughput accounting Ratio = Return per factory hour / Cost per factory hour