Throughput

Accounting
Definition
Underlying ideas / concepts
Bottleneck resources
Throughput Measures
Interpreting measures
Benefits of TA
Application in other sectors
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FRESH CLASSES
ICMAP STAGE 3
COST ACCOUNTING
PERFORMANCE
APPRAISAL
18TH FEBRUARY 2010
 JOIN KHALID AZIZ
 ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,
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.

 CONTACT:
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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 non-
bottleneck 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
 ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,
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.

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