Throughput Accounting

Contents

Throughput Accounting Concepts

Key Factor Analysis

Introduction

Theory Of Constraint Video

Throughput Accounting Ratio

Theory of Constraint

How to manage bottleneck theory

Throughput Working

Bottleneck Efficiency

Advantages and Disadvantages

Bottleneck Theory

Examples

Summary

Reference

Introduction

Summary

What is throughput ?

"Is a comprehensive management accounting that provides an accurate and comprehensive information to managers for decisions to improve company's profitability"

Introduced by Eliyah M. Goldratt

Brought as an alternative to traditional cost accounting

• Throughput Accounting provides managers with a transparent and focused method to make decisions that consistently guide them in the right decision to maximize profit.

History:

• Key Factor Analysis is part of Throughput Accounting process. Key Factor Analysis, in practice, is in a situation of products are manufactured the same limited resources.

Key Factor Analysis

• T.A.R. is followed by Key Factory Analysis calculation. It is explained as: the greater the T.A.R. the better the product.

• A situation where several products are manufactured, all of which use the same limited resources. Decisions need to be made on how best to use the limited resources.

• Financial constraints occur when a machine can only produce a limited number of products. This has an affect on the throughput contribution. Managing these constraints is the key to a company's success.

• The Key factor approach is to rank the products based on the contribution earned, per unit of the limited resources.

• There are a number of ways in which bottleneck resources can be made efficient. Therefore, improving throughput contribution .

Referencing

Throughput Accounting

ACCA. (2010). ACCA Qualification Course notes. Available: http://www.scribd.com/fullscreen/47689604?access_key=key-26kdtyd14k6dnzog3ddw. Last accessed 30th Nov 2012.

Goldratt, E (1984). The Goal Revised Edition . Aldershot: Gower. p22-40.

The key factor approach is sensible and the throughput approach is effectively the same. However, there are TWO main concepts of throughput accounting which result in amending the approach.

Goldratt, E. (1989). Throughput Accounting. Available: http://www.goldratt.co.uk/resources/throughput_accounting/index.html. Last accessed [30th Nov 2012].

Goldratt, E. Cox, J (1993). The Goal a Process of Ongoing Improvement . 2nd ed. Hampshire: Gower. p127-177.

The first Concept: throughput accounting is in the short run, costs in production are likely to be fixed with the exception of Material Costs

Horngren, C. Bhimani, A. Dater, S. Foster, G (2005). Management and Accounting . 3rd ed. Essex : Prentice Hall . p731-4.

The Second Concept: attempts to remove inventories in a (Just in time Environment). The use of a limited resource when producing inventories should be avoided. Therefore, work-in-progress should be valued at material costs.

Hutchin. T. (2011). What is Throughput Accounting. Available: http://www.toc-lean.com/PDF/What_Is_Throughput_Accounting.pdf. Last accessed [26th Nov 2012].

Throughput Accounting

Theory of Constraints

Problems arise when products are made from multiple parts and processed on different machines. With multiple parts and multiple machines, dependence arise among operations; some operations are bottlenecks; others are not.

The Theory of constraint describes "the methods used to maximize operating profit when faced with some bottleneck and some non-bottle neck operations" (Goldratt and Cox,1986)

Thank you

Objective - Increase throughput contribution while decreasing investment and operating costs.

Theory of Constraint (Real life Example)

Source: TED

Examples

Throughput Accounting Ratio

Maximum production plan

Bottleneck Theory

Definition:"An operation where the work required approaches or exceeds the availability of quantity"

(Horngren, C p.948, 2005)

How to manage bottleneck resources

1. Recognize bottleneck resources.

2. Search and find bottleneck resources.

3. Keep all bottleneck operations busy.

• Always running, never waiting
• Small amount of jobs must be assigned
• Set the pace for non-bottleneck machines
• Motivation

4. Action must be taken.

Bottleneck Efficiency

•Eliminate idle time

•Shift or outsource products to non-bottleneck machines

•Throughput contribution only increases bottleneck output

•Reduce setup and processing time

•Improve the quality of parts and products at the bottleneck operation

•There should be more quality improvement programs that focuses on minimal defects during production

Advantages and disadvantages of TA

• Focusing sales efforts on those products that truly make more money,
• Better judgement on which investments contribute to truly making money
• More realistic reporting of the effectiveness of the system as a whole in relation to its goal - making money now and in the future.

• Focus mainly on short term performance and ignores strategic performance
• Higher management still prefer to keep the traditional accounting legacy
• Does not focus in specific costs but the whole cost of the operations

Advantages:

Disadvantages: