Throughput Accounting Flashcards
What is throughput accounting?
Throughput accounting is a technique which aims to maximise profit by maximising throughput contribution.
In Throughput accounting the only cost which is deemed to relate to the volume of output is the direct material cost. All other costs (including labour costs) are deemed to be fixed and referred to as Total Factory Costs (TFC).
Throughput contribution is calculated as revenue less direct material costs.
When is throughput accounting most useful?
- For making short-term production decisions
- When there are limiting or scarce resources
- When there is spare capacity in production
- When there are problems controlling or understanding costs
- Where there is less emphasis on labour
How is throughput accounting useful for decisions on constrained resources?
Throughput accounting is particularly useful for decision making where there are constraining resources, known as bottlenecks, that are limiting the organisations ability to meet customer demand in full. This could be for example, not enough labour available or a machine whose capacity limits the output of the whole production process.
If the constraining resource cannot be removed, resources should be used in a way that still maximise profits. Throughput accounting can be used to identify the optimum production plan by giving priority to those products earning the highest throughput for each unit of the constraining resource that it requires.
What are the steps involved to use throughput accounting to rank products in order of priority when there is a constraining resource?
- Identify bottleneck constraint
- Calculate throughput contribution per unit for each product
- Calculate throughput contribution per unit of the bottleneck resource for each product
- Rank products in order of throughput contribution per unit of scarce resource
- Allocate resources using this ranking.
What are the downsides to throughput accounting?
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Long-Term Decision Making
- Throughput accounting only deems direct material costs as variable costs. This means it is more difficult to apply throughput accounting concepts in the longer term, when all costs can be considered variable.
- Although it may be suitable in the short term, an alternative method, such as ABC, may be more suitable to measure and control performance from a longer-term perspective.
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Other Factors ignored
- Sometimes other factors are ignored. For example contractual requirements that limit production or the effect on customer relations of delaying the production of one product to prioritise another.
How will the level of labour relate to throughput accounting?
Throughput accounting does not consider labour costs to relate to production volume and instead includes it as a fixed cost.
In modern manufacturing environments with high levels of machinery and less emphasis on labour, labour is more like an overhead than a direct cost and throughput accounting may therefore be more relevant.
How does throughput accounting allocate costs to products?
Throughput accounting is not a costing method as it does not allocate costs to products and services. The throughput earned by individual products is calculated. But all other costs are taken into account separately as TFC and are not allocated directly to the products.
How is throughput accounting useful for cost control?
It can be useful when there are problems controlling or understanding costs. Throughput is beneficial to help an organisation challenge how they consider the costs to better understand and control them.
How is throughput useful when there is spare capacity in production?
If there is spare capacity in production, for example extra labour hours available. A consideration of throughput per unit could help the business make production decisions on how to use this spare capacity.
