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

2. JOIN KHALID AZIZ
FRESH CLASSES
ICMAP STAGE 3
COST ACCOUNTING PERFORMANCE APPRAISAL
18TH FEBRUARY 2010

3. 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.
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4. 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

5. 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

6. 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

7. 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

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

9. 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

10. 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

11. 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

12. 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)

13. 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

14. 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

15. 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:
R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.