Throughput Accounting

Definition Underlying ideas / concepts Bottleneck resources Throughput Measures Interpreting measures Benefits of TA Application in other sectors

JOIN KHALID AZIZ

FRESH CLASSES ICMAP STAGE 3 COST ACCOUNTING

PERFORMANCE APPRAISAL 18TH FEBRUARY 2010

JOIN KHALID AZIZ

B.COM.  FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.  COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.
     ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,

CONTACT: 0322-3385752 0312-2302870 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.

Definition
A management accounting system which focuses on ways by which the maximum return per unit of bottleneck activity can be achieved. CIMA OT TA is therefore a development of TOC TA emphasises: Throughput Inventory Minimisation (thus link with JIT) Cost control

Underlying ideas
Only materials costs are variable in short term As inventory should be nil, idle capacity may be acceptable (but not for bottleneck) Profit is earned when goods are sold, thus inventory is valued at material cost only

Bottleneck resources
If bottlenecks cannot be eliminated, volume is limited to the bottleneck capacity This minimises WIP Eliminating one bottleneck creates another Primary concern is managing bottlenecks Bonuses paid or improved efficiency in nonbottleneck processes is wasted Bottlenecks may not be the only problem

Measures
Machine utilisation if machine capacity is resource constraint, the bottleneck can be identified by this = machine hours to meet sales demand machine hours available Highest rate = bottleneck

Throughput measures
Return per time period = sales revenue material cost time period indicates value added in a period encourages removal of bottleneck

Throughput measures
Return per time period on bottleneck resource = sales price material cost minutes of bottleneck resource Used to rank products to optimise short term production Similar to utilisation of limiting factor As bottlenecks change, ranking may change Also other factors must be considered

Throughput measures
Throughput accounting ratio (T/A Ratio) = throughput contribution per time period conversion cost per time period Includes factory running costs Requires factory costs to be allocated to products Profitable = ratio > 1 Higher ratio = higher profitability

Throughput measures
Effectiveness ratio = standard minutes of throughput achieved minutes available More relevant as staff should work to produce inventory, thus traditional variances are unsuitable

Interpreting Measures
By treating only material as variable cost, TA may be seen as too short term Focus is on maximising throughput, not profit While profit will often follow throughput, production may be above profit maximising output level (e.g as market demand may be less)

Benefits of TA
Directs attention to bottlenecks Highlights key elements of profit Reduces inventory and associated costs Speeds up response to customer demand Smoothes production flow Focus is on effectiveness, not efficiency

Application to other sectors

Retailing: has long since focused on sales value and cash generation Support activities often the bottleneck e.g despatch / order processing Utilisation of high grade staff for lower level tasks e.g dentist / hygienist

JOIN KHALID AZIZ

B.COM.  FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.  COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.
     ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,

CONTACT: 0322-3385752 0312-2302870 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.