ACCA F5 Article – Throughput accounting and back-flush costing

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The third article on Section A of the F5 syllabus looks at throughput accounting and
back-flush accounting. Both have been developed in response to relatively modern
advances in manufacturing:
1. The increased reliance of manufacturing businesses on sophisticated and
expensive facilities and machinery. This greatly increases the proportion of costs
which are fixed. (This was one reason why activity based costing has become
more important: if fixed costs are more significant they should be dealt with more
accurately.)
2. A recognition that holding inventory is likely to be a waste of resource.
3. The increased use of just-in-time manufacturing, so that inventory, particularly
work-in-progress, is much reduced and its valuation is therefore less important.

Throughput accounting

Throughput accounting has a very direct relationship with decision-making and
performance management. It begins by focusing on what an organisation’s purpose is –
its goal – and seeks to help organisations attain their purpose by increasing their ‘goal
units’. The approach can be applied in both profit-seeking and not-for-profit
organisations, provided meaningful goal units can be identified.

For example, take a not-for profit organisation which performs a medical screening
service in three sequential stages:
1. Take an X-ray.
2. Interpret the result.
3. Recall patients who need further investigation/tell others that all is fine.
The ‘goal unit’ of this organisation will be to progress a person through all three stages.
The number of people who complete all the stages is the organisation’s throughput, and
the organisation should seek to maximise its throughput. However, there will always be a
limit to throughput, and the resource which sets that limit is called the ‘bottleneck
resource’.

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