 Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, THE THEORY OF CONSTRAINTS AND THROUGHPUT ACCOUNTING Teaching Slides

 Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, Boys on a Hike

 Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, v What represents the production operations? v What represents the raw materials inventory? v What represents walked trail? v What was the constraint in this specific hiking process? Boys on a Hike

 Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, Drum-Buffer-Rope System v Purpose of drum signals and schedules v Purpose of rope signals and schedules v Purpose of buffer inventory

 Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, Drums, Buffers, and Ropes in a Production Process (Exhibit 2)

 Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, Product Concept & Feasibility Product Strategy and Plans Product / Process Design & Development Production and Logistics Management Accounting Tools:  Multi-Year Product and Profit Plan  Target Costing  Competitor Cost and Technology Analysis  Capital Budgeting  Capacity Planning  Others Product Development Cycle Operational Tools:  Kaizen  Root Cause Analysis  ABM/C  Learning Curve  SPC  Benchmarking  Others Before Release to ProductionAfter Release to Production  TOC D:\Modules\Figure from TC Exhibit 1 Strategic Position of TOC

 Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, The Five-Step TOC Process v Step 1. Identify the system's constraint(s). v Step 2. Decide how to exploit the system's constraint(s). v Step 3. Subordinate everything else to the above decision. v Step 4. Elevate the constraint(s). v Step 5. If a constraint has been broken, go back to step 1.

 Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, Breaking Constraints for Continuous Improvement (Kaizan) using TOC (Exhibit 6)

 Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, New Accounting Definitions v Throughput –Sales less Direct Materials (and out-of-pocket selling costs, if any) v Operating Expense –All costs of production other than costs of Direct Materials

 Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, Comparing Three P&L Statements (Exhibit 7) a Sales Price is $5,000 per ton, 100 tons produced and sold b Direct Materials ($50,000) + Direct Labor ($20,000) + Variable Manufacturing Overhead ($15,000) + Variable Selling & General Administrative Expense ($70,000) c Fixed Manufacturing Overhead ($35,000) + Fixed Selling & General Administrative Expense ($280,000) d All costs in the organization other than Direct Materials. GAAP BasisContribution Margin BasisThroughput Basis Revenue$500,000 a Revenue$500,000 a Revenue$500,000 a Cost of Goods Sold(120,000) VariableCosts b (155,000) Direct Materials( 50,000) Gross Margin$380,000Contribution Margin$345,000Throughput Margin$450,000 Sell. & Gen. Admin. Exp.(350,000) FixedCosts c (315,000) Operating Expense d (420,000) Operating Income$ 30,000 Operating Income$ 30,000 Operating Income$ 30,000

 Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, Differences Between GAAP and Throughput Accounting (Exhibit 8)

 Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, P&L Statement Based on Throughput Margin Analysis

 Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, Technical Attributes (Exhibit 9)

 Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, Behavioral Attributes v Benefits –Sub-optimal behavior –Communication v Risks –Reducing slack in non-bottlenecks –Inattention to non-bottlenecks –Operational versus Strategic management focus

 Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, Cultural Attributes (Exhibit 14) Prior AssumptionCurrent Fact Keeping people busy is the key to making money.A focus on labor utilization hinders cash flow due to high inventory and the emphasis on keeping people busy. By keeping utilization high, employees help the company perform well financially. High utilization of resources does not correlate to profitability. High labor-utilization rates ensure high levels of customer satisfaction. High utilization of resources does not necessarily correlate to high customer satisfaction. If managers release workers to other areas of the operation, they may not get them back when they need them. Managers will willingly release workers to go where the work is when right performance measures are used. Traditional accounting standards tell managers whether they are effective as a total enterprise. Traditional standards are subjective, inaccurate, and require constant monitoring. Maximizing the production output per setup and building inventory is key to making money. Making only what customers order is the key to making money, and on-time delivery is the critical success factor.