Throughput accounting

Content

01 Background

02 Calculate and interpret TPAR

03 Improving TPAR

04 Throughput accounting in a multi-product

decision-making problem
Background
 Theory of constraints (TOC)
TOC is an approach of production management which aims to
maximize sales revenue less material cost. It focuses on factors
such as bottlenecks which act as constraints to this maximization.

Bottleneck resource or binding constraints is an activity which

has a lower capacity than preceding or subsequent
activities,thereby limiting throughput.
Throughput = sales revenue – direct material costs

Assumptions:
 The material is the only totally variable cost in the short-term.
 Direct labor costs are not variable in the short- term. Many
employees are usually guaranteed a minimum weekly wage.
Process A (can Process B (can process Process C(can process
process 100kgs hour) 90kgs hour) 100kgs per hour)

100kgs 90kgs 90kgs

10kgs of WIP
 Lecture example
Glam Co is a hairdressing salon which provides both ‘cuts’ and
‘treatments’ to clients. All cuts and treatments at the salon are
carried out by one of the salon’s three senior stylists. The salon also
has two salon assistants and two junior stylists.
Every customer attending the salon is first seen by a salon assistant,
who washes their hair; next, by a senior stylist, who cuts or treats
the hair depending on which service the customer wants; then
finally, a junior stylist who dries their hair. The average length of
time spent with each member of staff is as follows:
Cut Treatment
Hours Hours
Assistant 0·1 0·3
Senior stylist 1 1·5
Junior stylist 0·5 0·5
The salon is open for eight hours each day for six days per week. It
is only closed for two weeks each year.
Lecture example
The senior stylists’ time has been correctly identified as the
bottleneck activity.

Required:
(a) Briefly explain why the senior stylists’ time has been described
as the ‘bottleneck activity’, supporting your answer with
calculations.
 Bottlenecks management
There are five steps for dealing with a bottleneck activity:

Step1 – Identify the binding constraints.

Step2 – Exploit. The highest possible output must be
achieved from the binding constraint. Such as a
buffer inventory should be held before the
constraints.
Step3 – Subordinate. Operations prior the binding
constraints should operate at the same as it so WIP
does not hold up.
Step4 – Elevate the systems bottleneck. Steps should be
taken to increase there sources or improve its
efficiency.
Step5 – Return to step 1. (new bottleneck will appear)
• There will always be a binding constraint unless the
output capacity is greater than the demand?

• Idle time should be avoided in areas of production that

are not a bottleneck resource?

• A principle of throughput accounting is that a buffer

inventory should be built up for output from the
bottleneck resource?

• In TA, inventory has no value and should be valued at

$0?

• In TA, labour time and machine time should be used to

full capacity to maximising the efficiency?
 Question

The following statements have been made in relation to the

concepts outlined in throughput accounting:
(i) Inventory levels should be kept to a minimum
(ii) All machines within a factory should be 100% efficient,
with no idle time
Which of the above statements is/are correct?
A. (i) only
B. (ii) only
C. Both (i) and (ii)
D. Neither (i) nor (ii)
Calculate and interpret TPAR
 Calculate and interpret TPAR
lack of labour hour(2000hr) demand 1000units@3hr per unit=3000hr
labour cost + other FC=$10000

sales price per unit=$10 material cost per unit=$1

 考试形式一：TPAR 计算
Throughput per factory hour(usually in unit)
Sales - direct material costs
=
bottleneck hour(factory hour) per unit

Factory cost per factory hour(usually in total)

Total factory cost
=
Total bottleneck hours

Throughput accounting ratio (TPAR)

Throughput (Return) per bottleneck hour
=
factory cost per bottleneck hour
 Lecture example
Product X is made in a production process where machine time is a
bottleneck resource. One unit of Product X requires 0.1 machine hours.
The costs and selling price of Product X are as follows:
$
Materials 6
Labour (0.25 hours) 3
Other factory costs 5
14
Sales price 15
Profit 1

In a system of throughput accounting, what is the return per factory

hour?
A $90
B $60
C $10
D $4
 Lecture example
Acompany manufactures a product which requires four hours
per unit of machine time. Machine time is a bottleneck resource
as there are only ten machines which are available for 12 hours
per day, five days per week. The product has a selling price of
$130 per unit, direct material costs of $50 per unit, labor costs
of $40 per unit ana factory overhead costs of $20 per unit.
These costs are based on weekly production and sales of 150
units.

What is the throughput accounting ratio (to 2 decimal

places)?

A 1.33
B 2.00
C 0.75
D 0.31
 Lecture example - Question
Peppa Company produces three products, X, Y and Z. The
capacity of Peppa's plant is restricted by process Alpha.
Process Alpha is expected to be operational for eight hours
per day and can produce 1,200 units of X per hour, 1,500
units of Y per hour, and 600 units of Z per hour.

Selling prices and material costs for each product are as

follows.
Product T Selling price $ Material cost $ Throughput $
per unit per unit per unit
X 150 80 70
Y 130 40 90
Z 300 100 200
Operating costs are $720,000 per day.
 Lecture example - Question
Required

(a) Calculate the profit per day if daily output achieved is 6,000
units of X, 4,500 units of Y and 1,200 units of Z.

(b) Calculate the TA ratio for each product.

 Lecture example - Solution
(a) Profit per day = Throughput – Operating costs
= [($70×6,000) + ($90×4,500) + ($200×1,200)] – $720,000
= $345,000

(b) TA ratio = Throughput per factory hour/ Operating costs per factory hour
Operating costs per factory hour = $720,000/8 = $90,000

Product Throughput per factory hour Cost per factory hour TA ratio <1
ways of raising the TA ratio
X $70× 1,200 = $84,000 $90,000 0.93 OR,ceasing production

Y $90× 1,500 = $135,000 $90,000 1.50

Z $200 × 600 = $120,000 $90,000 1.33
 Lecture example
Glam Co is a hairdressing salon which provides both ‘cuts’ and
‘treatments’ to clients. All cuts and treatments at the salon are
carried out by one of the salon’s three senior stylists. The salon also
has two salon assistants and two junior stylists.
Every customer attending the salon is first seen by a salon assistant,
who washes their hair; next, by a senior stylist, who cuts or treats
the hair depending on which service the customer wants; then
finally, a junior stylist who dries their hair. The average length of
time spent with each member of staff is as follows:
Cut Treatment
Hours Hours
Assistant 0·1 0·3
Senior stylist 1 1·5
Junior stylist 0·5 0·5
The salon is open for eight hours each day for six days per week. It
is only closed for two weeks each year.
Lecture example
Staff salaries are $40,000 each year for senior stylists, $28,000 each
year for junior stylists and $12,000 each year for the assistants. The
cost of cleaning products applied when washing the hair is $0·60
per client. The cost of all additional products applied during a
‘treatment’ is $7·40 per client. Other salon costs (excluding labour
and raw materials) amount to $106,400 each year.
Glam Co charges $60 for each cut and $110 for each treatment.
The senior stylists’ time has been correctly identified as the
bottleneck activity.

Required:
(b) Calculate the throughput accounting ratio (TPAR) for ‘cuts’ and
the TPAR for ‘treatments’ assuming the bottleneck activity is fully
utilised.
Improving TPAR
 Suggest how a TPAR could be improved

sales price- material cost

Throughput accounting ratio (TPAR)

Throughput (Return) per factory hour ↑

=
Cost per factory hour ↓

labour cost+ other cost

分子throughput:
• Increase the sales price for each unit sold => unsold
stock/idle equipment
• Reduce material costs per unit

分母operating expenses:
• Labor cost
• other factory cost

Improve productivity/efficiency of the bottleneck to reduce

the time required to make each unit

Capacity:more hours available of the bottleneck resource

 Lecture example
A manufacturing company uses throughput accounting. It has
identified Labour Grade A as its bottleneck resource. Which
one of the following measures will improve its total
throughput?

(1) Reduce the selling prices of some products in order to

increase sales demand.
(2) Improve the efficiency of machine usage by cutting down
wastage.
(3) Pay Grade A labour overtime at a premium of $4 per hour
in order to work additional hours.

A Measure 1
B Measure 2
C Measure 3
D None of the measures will increase throughput
 Lecture example
A manufacturing company uses three processes to make its two
products, X and Y. The time available on the three processes is
reduced because of the need for preventative maintenance and
rest breaks.
The table below details the process times per product and daily
time available:
Process Hours available Hours required Hours required
per day to make one unit to make one unit
of product X of product Y
1 22 1·00 0·75
2 22 0·75 1·00
3 18 1·00 0·50
Daily demand for product X and product Y is 10 units and 16 units respectively.
Which of the following will improve throughput?
A. Increasing the efficiency of the maintenance routine for
Process 2
B. Increasing the demand for both products
C. Reducing the time taken for rest breaks on Process 3
D. Reducing the time product X requires for Process 1
Throughput accounting in a multi-
product decision-making problem
 Throughput accounting in multi-products decision making
Step 1 - Identify the bottleneck.

Step 2 - Calculate the throughput per unit for each product.

Step 3 - Calculate the throughput per unit of the bottleneck

resource for each product.

Step 4 - Rank the products in the order of the result from

step 3.

Step 5 - Allocate resources using this ranking.

 Lecture example - Question
WR Co manufactures three products, A, B and C. Product
details are as follows
Product A Product B Product C
$ $ $
Sales price 2.80 1.60 2.40
Materials cost 1.20 0.60 1.20
Direct labour cost 1.00 0.80 0.80

Weekly sales demand 4,000 units 4,000 units 5,000 units

0.5 hours 0.2 hours 0.3 hours
Machine hours per unit

Machine time is a bottleneck resource and maximum capacity is

4,000 machine hours per week. Operating costs including direct
labour costs are $10,880 per week. Direct labour workers are not
paid overtime and work a standard 38 hour week.
 Lecture example - Question
Required

Determine the optimum production plan for WR Co and calculate the

weekly profit that would arise from the plan.
 Lecture example - Solution
Step 1 Determine the bottleneck resource
The bottleneck resource is machine time (4,000 machine hours
available each week).
Step 2 Calculate the throughput per unit for each product

Product A Product B Product C

$ $ $
Sales price 2.80 1.60 2.40

Materials cost 1.20 0.60 1.20

Throughput/unit 1.60 1.00 1.20

 Lecture example - Solution
Step 3 Calculate through per unit of limiting factor (machine hours)

Product A Product B Product C

Machine hours per unit 0.5 hours 0.2 hours 0.3 hours
Throughput per machine hour $3.20* $5.00 $4.00
*$1.60 / 0.5 hours = $3.20

Step 4 Rank products

Product A Product B Product C

3rd 1st 2nd
 Lecture example - Solution
Step 5 Allocate resources to arrive optimum production plan
The profit – maximising weekly output and sales volumes are as
follows.
Product Units Bottleneck resource Total Throughput Total
hours/unit hours per hour throughp
ut
$ $
B 4,000 0.2 hours 800 5.00 4,000
C 5,000 0.3 hours 1,500 4.00 6,000
2,300
A(balance) 3,400 0.5 hours 1,700 3.20 5,440
4,000 15,440

Less: operating
expenses (10,880)
Profit per week 4,560
Thank You
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