throughput accounting

Question 1

what us throughput accounting

Answer 1

the rate at which the system generates money through sales. thus its the many received by the business from sales after deducting material costs

Question 2

what is Theory of constraints

Answer 2

what do we do when we have constraints? and how do we reduce the bottlenecks and constraints to a heave maximin efficiency. how to increase the number of outputs that come from the amount of inputs

Question 3

how to calculate the throughput contribution

Answer 3

sales - material cost

Question 4

what is bottleneck resource

Answer 4

the factor that prevents the organization form meeting its goals. this its an activity that limits the throughput contribution

Question 5

what is inventory

Answer 5

is all the money that the system has invested in purchasing things that it intends to sell

Question 6

how is inventory valued at throughput accounting

Answer 6

only at material cost

Question 7

what is operational expense

Answer 7

all the money that the system spends in order to turn raw material into sales. This it includes direct labour and factory overheads. this operational cost is assumed to be fixed

Question 8

what is just in time system in throughput accounting?

Answer 8

follows theory that all inventory is bad and production and ordering of material should only happen when order comes

Question 9

how does this reduce cost

Answer 9

this is due to the fact that there is no need of staff to look after inventory and no need for operating software systems for inventory

Question 10

why is this theory not 100% applicable In real world

Answer 10

this is due to the fact that id there is a problem in the bottleneck extra buffer stick should be kept which can be given to customers in case the bottleneck is Taking too long

Question 11

what is the difference between throughput costing and traditional costing

Answer 11

in traditional costing we produce as fast as possible and build up inventory

in tp costing we produce at the rate of the bottleneck to reduce inventory

Question 12

what are the steps involved in the calculation of throughput accounting ratio (6)

Answer 12

1. identify the bottleneck resource or acticyt
2. calculate there contribution per unit for each product (tp contribution = sales - material costs)
3. calculate the contribution per limiting factor/ bottleneck resource (contribution per unit / bottleneck hours needed per unit)

OR

(contribution per unit x units per bottleneck hour)

4. calculate conversion sot per factory hour (labour cost + factory overheads)/ number of bottleneck resource hours

NOTE: here the cost in numerator should correspond to the hours in denominator from time point of view

5. calculate throughput accounting ratio
6. rank the products based upon throughput accounting ratio

Question 13

how to interpret the tp accounting ration

Answer 13

if TPAR >1 this would suggest this contribution is higher than costs so product would make a profit. priority should be given ro the products generating the best ratios

if TPAR<1 then this would suggest that costs is higher them contribution resulting in a loss.

Question 14

what are ways to improve the throughput accounting ratio?

Answer 14

1. speed up the bottleneck process e.g automation or investing in new technology
2. increasing the selling price but sometimes hard in competitive market
3. reduce the material prices by negotiating with or shifting suppliers
4. reduce the level of fixed costs e.g outsourcing de-skilling or using alternative suppliers

Question 15

what are the main assumptions of TPAR

Answer 15

1. the only total variable cost in the short-term is the purchase cost of raw materials that are bought from external suppliers
2. direct labour costs are not variable in the short-term . Many employees are salaried and even if paid a rate per unit, are usually guaranteed a weekly min mum wage

Question 16

what are the criticisms of TPAR 3

Answer 16

1. it only concentrates on short term , when a business has a fixed supply of resources ie a bottleneck and operating expenses are largely fixed. however mist businesses can’t produce only. looking at short terms
2. it is difficult to apply in long term as there are no fixed costs in the long term
3. in the longer term an ABC approach might be more appropriate for measuring and controlling performance