Mohd Shukri PM_F5 Notes (Throughput Accounting)

Learning outcomes Example past exam questions Notes

Discuss and apply theory of constraints

Calculate and interpret a TPAR Q16-20 Section B– Specimen exam

Suggest how TPAR could be improved
Apply throughput accounting to a multi-
product decision-making problem
Q26 Section B – Dec 2016
Q11 Section A – Dec 2016
Q3 Section A – Dec 2016
Q28-Q30 Section B – Dec 2016
Q27 Section B – Dec 2016

1. Throughput Accounting

- Traditional: Focus & maximisation of profit

- Throughput (TP): Money obtained from sales – material (cost)

- TP Aims: Support production management system
: maximise throughput
: cash generated from sales

- Theory of constraint : Factory production capacity = Bottleneck capacity

: material is only variable cost
: Operates in JIT environment
: WIP valued at material cost only

- Operational expenses: factory expenses (DL + OH) – must be related to production only
: All assume fixed costs

2. Bottleneck

- Production resources such as time available of machine

- Labour time
- Selling such as number of sales executives
- Supplier and customer (delivery time)

- Goldratt 5 steps:

Step 1: Identify BT (with sales or without sales)

Step 2: Exploit BT (BT run full capacity)
Step 3: Subordinate no BT (accept idle time)
Step 4: Elevate BT capacity (increase capacity/efficiency)
Step 5: Return to step 1

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Mohd Shukri PM_F5 Notes (Throughput Accounting)

3. Traditional vs Throughput

4. Throughput performance measurement

- Throughput is maximise by rank (same as contribution/limiting factor)

- But now using throughput per limiting factor

- Ratio calculated by:

Sales – DM
usage of bottleneck in hours (factory hours)

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Mohd Shukri PM_F5 Notes (Throughput Accounting)

Quick test 1

- ABC Co manufactures 3 product X, Y and Z.

Product X Product Y Product Z

$ $ $
Sales price 2.80 1.60 2.40
Material cost 1.20 0.60 1.20
Direct labour cost 1.00 0.80 0.80

Monthly sales demand 4000 4000 5000

Machine hours/unit 0.5 hours 0.2 hours 0.3 hours

- Maximum capacity is 4000 machine hours/month

- Operating cost $10,880
- Direct labour standard work at standard 38-hour per month (no overtime)

Answer : 4,560

Solution:
Step 1: Determine bottleneck resource (LF)
Step 2: Calculate Throughput per unit/LF
Step 3: Rank
Step 4: Allocate resources

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Mohd Shukri PM_F5 Notes (Throughput Accounting)

5. TPAR

- Ratio calculated > 1.0

- per unit bottleneck resource = per factory hour

- Ratio calculated by:

Quick test 2

- ABC Co produce 1 product which takes 2 hours to make on machine Y

- Capacity of machine Y is restricted to 500 hours per week
- Selling price is $160 and material cost is $20.
- Total operating costs are $30,000 per week

Requirement:
Calculate the TPAR

Answer : 1.17

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Mohd Shukri PM_F5 Notes (Throughput Accounting)