Which of the following best defines throughput
Which of the following best describes how throughput costing applies costs?Just to the unit ofproduction&to the unit onlyWhich of the following best describes the main concept of throughput costing?It is a systemthat affects the entire system of the business.Variable Costing vs. Absorption Costing Show The absorption cost income statement is for external use. According to what standard or law-setters should it be presented?Generally Accepted Accounting Principles (GAAP)Theabsorptionstatement can be a bit confusing because of the lack of defined details.The variable costing method looks at fixed manufacturing costs as aperiodcost.Underabsorptioncosting, if inventories increase, then a portion of the fixed manufacturingoverhead cost of the current period is deferred to future periods in the inventory account.Undervariablecosting, only the variable manufacturing costs are included in inventory.Which of the following are the items that can be found on the absorption income statement?Costof goods sold, Sales Which of the following expense items is part of the income statement under variable costing? Capital BudgetingCapital Budgeting Analysis Capital budgeting involves deciding what toinvestin. Match the financial information needed to the correct capital budgeting method: simple payback,net present value, or internal rate of return. (Choose any 2 items for each category.)Simple payback: Amount of time in years or months & Recoup initial investmentInternal rate or return: Comparison to benchmark hurdle rate & Cost of capitalNet present value: Present value of investment & Present value of financial benefitsThe analysis for capital budgeting includes priorknowledgeand background about anorganization.The capital budgeting process is focused onlong-termoutcomes.There are3primary methods of evaluating capital budgeting decisions. In the previous article, a member of the Performance Management examining team revealed all about The Goal, the book in which the theory of constraints and throughput accounting were introduced in the context of a novel. In this second article, she sets out the five focusing steps of the theory of constraints, briefly explaining each one and then will go through two examples showing you how these steps might be applied in practice or in exam questions. It’s worth noting at this stage that, while the theory of constraints and throughput accounting were introduced in The Goal, they were further developed by Goldratt later. The five focusing stepsThe theory of constraints is applied within an organisation by following what are called ‘the five focusing steps.’ These are a tool that Goldratt developed to help organisations deal with constraints, otherwise known as bottlenecks, within the system as a whole (rather than any discrete unit within the organisation.) The steps are as follows: Step 1: Identify the system’s bottlenecks
The total time required to make 50,000 units of the product can be calculated and compared to the time available in order to identify the bottleneck.
It is clear that the heating process is the bottleneck. The organisation will in fact only be able to produce 40,000 units (120,000/3) as things stand. Step 2: Decide how to exploit the system’s bottlenecks Step 3: Subordinate everything else to the decisions made in Step 2 Step 4: Elevate the system’s bottlenecks This example of elevating a bottleneck without cost is probably unusual. Normally, elevation will require capital expenditure. However, it is important that an organisation does not ignore Step 2 and jumps straight to Step 4, and this is what often happens. There is often untapped production capacity that can be found if you look closely enough. Elevation should only be considered once exploitation has taken place. Step 5: If a new constraint is broken in Step 4, go back to Step 1, but do not let inertia become the system’s new bottleneck I am now going to have a look at an example of how a business can go about exploiting the system’s bottlenecks – ie using them in a way so as to maximise throughput. In practice, there may be lots of options open to the organisation such as the ones outlined in The Goal. In the context of an exam question, however, you are more likely to be asked to show how a bottleneck can be exploited by maximising throughput via the production of an optimum production plan. This requires an application of the simple principles of key factor analysis, otherwise known as limiting factor analysis or principal budget factor. Limiting factor analysis and throughput accountingOnce an organisation has identified its bottleneck resource, as demonstrated in Step 1 above, it then has to decide how to get the most out of that resource. Given that most businesses are producing more than one type of product (or supplying more than one type of service), this means that part of the exploitation step involves working out what the optimum production plan is, based on maximising throughput per unit of bottleneck resource. In key factor analysis, the contribution per unit is first calculated for each product, then a contribution per unit of scarce resource is calculated by working out how much of the scarce resource each unit requires in its production. In a throughput accounting context, a very similar calculation is performed, but this time it is not contribution per unit of scarce resource which is calculated, but throughput return per unit of bottleneck resource. Throughput is calculated as ‘selling price less direct material cost.’ This is different from the calculation of ‘contribution’, in which both labour costs and variable overheads are also deducted from selling price. It is an important distinction because the fundamental belief in throughput accounting is that all costs except direct materials costs are largely fixed – therefore, to work on the basis of maximising contribution is flawed because to do so is to take into account costs that cannot be controlled in the short term anyway. One cannot help but agree with this belief really since, in most businesses, it is simply not possible, for example, to hire workers on a daily basis and lay workers off if they are not busy. A workforce has to be employed within the business and available for work if there is work to do. You cannot refuse to pay a worker if he is forced to sit idle by a machine for a while. Example 1
There are 320,000 bottleneck hours available each month. Required: Solution:
It is worth noting that, before the time taken on the bottleneck resource was taken into account, product E appeared to be the most profitable because it generated the highest throughput per unit. However, applying the theory of constraints, the system’s bottleneck must be exploited by using it to produce the products that maximise throughput per hour first (Step 2 of the five focusing steps). This means that product G should be produced in priority to E. In practice, Step 3 will be followed by making sure that the optimum production plan is adhered to throughout the whole system, with no machine making more units than can be absorbed by the bottleneck, and sticking to the priorities decided. When answering a question like this in an exam it is useful to draw up a small table, like the one shown below. This means that the marker can follow your logic and award all possible marks, even if you have made an error along the way.
Each time you allocate time on the bottleneck resource to a product, you have to ask yourself how many hours you still have available. In this example, there were enough hours to produce the full quota for G and E. However, when you got to F, you could see that out of the 320,000 hours available, 270,000 had been used up (120,000 + 150,000), leaving only 50,000 hours spare. Therefore, the number of units of F that could be produced was a balancing figure – 50,000 hours divided by the four hours each unit requires – ie 12,500 units. The above example concentrates on Steps 2 and 3 of the five focusing steps. I now want to look at an example of the application of Steps 4 and 5. I have kept it simple by assuming that the organisation only makes one product, as it is the principle that is important here, rather than the numbers. The example also demonstrates once again how to identify the bottleneck resource (Step 1) and then shows how a bottleneck may be elevated, but will then be replaced by another. It also shows that it may not always be financially viable to elevate a bottleneck. Example 2:
The demand for the product is 1,000 units per week. For every additional unit sold per week, net present value increases by $50,000. Cat Co is considering the following possible purchases (they are not mutually exclusive): Purchase 1: Replace machine X with a newer model. This will increase capacity to 1,100 units per week and costs $6m. Purchase 2: Invest in a second machine Y, increasing capacity by 550 units per week. The cost of this machine would be $6.8m. Purchase 3: Upgrade machine Z at a cost of $7.5m, thereby increasing capacity to 1,050 units. Required: Solution:
From the table above, it can be seen that once a bottleneck is elevated, it is then replaced by another bottleneck until ultimately market demand constrains production. At this point, it would be necessary to look beyond production and consider how to increase market demand by, for example, increasing advertising of the product. In order to make a decision as to which of the machines should be purchased, if any, the financial viability of the three options should be calculated.
The company should therefore invest in all three machines if it has enough cash to do so. The example of Cat Co demonstrates the fact that, as one bottleneck is elevated, another one appears. It also shows that elevating a bottleneck is not always financially viable. If Cat Co was only able to afford machine Z, it would be better off making no investment at all because if Z alone is invested in, another bottleneck appears too quickly for the initial investment cost to be recouped. RatiosI want to finish off by briefly mentioning throughput ratios. There are three main ratios that are calculated: (1) return per factory hour, (2) cost per factory hour and (3) the throughput accounting ratio. 1. Return per factory hour = Throughput per unit / product time on bottleneck resource. 2. Cost per factory hour = Total factory costs / total time available on bottleneck resource. 3. Throughput accounting ratio (TPAR) = Return per factory hour/cost per factory hour. ConclusionAt this point, I’m hopeful that you are now looking forward to reading The Goal as soon as possible and that you have a better understanding of the theory of constraints and throughput accounting, which you can put into practice by tackling some questions. Written by a member of the Performance Management examining team Which of the following is the best definition for throughput time?Throughput time is the actual time taken for a product to be manufactured. This is the duration of time required for the production process as well as the other time periods involved in converting raw materials into finished goods.
What is throughput time quizlet?Throughput time is defined as. The total elapsed time from the start to the finish of a job being processed at one or more work centers.
Which of the following best describes the master production schedule?Master production schedule (MPS) is a term used to describe a centralized document telling you what you need to produce, how much you need to produce, and when you need to produce it. In short, everything related to production in your business, including time frames, such as your manufacturing lead time.
Which of the following best describes an exception message?Which of the following best describes an exception message? Using a non-bottleneck 100% of the time does not produce 100% utilization, the capacity of the production processes depends on the capacity of the bottleneck, capacity and demand must be considered together.
|