Throughput accounting
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Throughput Accounting. Definition Underlying ideas / concepts Bottleneck resources Throughput Measures Interpreting measures Benefits of TA Application in other sectors. JOIN KHALID AZIZ. FRESH CLASSES ICMAP STAGE 3 COST ACCOUNTING PERFORMANCE APPRAISAL 18 TH FEBRUARY 2010.

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Throughput Accounting

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Throughput accounting

Throughput Accounting

Definition

Underlying ideas / concepts

Bottleneck resources

Throughput Measures

Interpreting measures

Benefits of TA

Application in other sectors


Join khalid aziz

JOIN KHALID AZIZ

  • FRESH CLASSES

  • ICMAP STAGE 3

  • COST ACCOUNTING PERFORMANCE APPRAISAL

  • 18TH FEBRUARY 2010


Join khalid aziz1

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:

  • 0322-3385752

  • 0312-2302870

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


Definition

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


Underlying ideas

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


Bottleneck resources

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


Measures

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


Throughput measures

Throughput measures

Return per time period

=sales revenue – material cost

time period

indicates value added in a period

encourages removal of bottleneck


Throughput measures1

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


Throughput measures2

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


Throughput measures3

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


Interpreting measures

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)


Benefits of ta

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


Application to other sectors

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


Join khalid aziz2

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:

  • 0322-3385752

  • 0312-2302870

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


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