Throughput Accounting

Question 1

What is Throughput accounting?

Answer 1

The only cost that is deemed to relate to volume of output is direct material costs. All other costs including labour costs are deemed to be fixed.

This method is used for constraints or bottlenecks, e.g. material shortages or machine breakdowns

It aims to maximise through put contribution .

If the business has a constraint that prevents it from meeting customer demand it should make the most profitable used of that constraining resource. This means giving priority to those products earning the highest group for each unit of the containing resource it requires.

Question 2

Throughput Contribution

Answer 2

= Revenue - direct material costs

Question 3

How do you allocate the bottleneck resource to products

Answer 3

1. Identify the bottleneck constraint.
2. Calculate throughput contribution for each unit for each product.
3. calculate throughput contribution per unit of the bottleneck resource for each product.
4. Rank the products in order.
5. Allocate resources using this ranking.

Question 4

KPIs for throughput accounting

Answer 4

• maximising return per factory hour
• Minimising cost per factory hour
• Only producing products with a through put accounting ratio greater than 1