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For the following question, I do not understand why conversion cost is not put into consideration.
Question #38 :
A manufacturing company uses machine C, which is operational for five hours a day to manufacture four products: W, X, Y and Z. Factory costs are $150,000 per day. The company uses throughput accounting and its objective is to maximize profits.
Information relating to these products is as follows:
Products——-Production rate per machine hour (units)
—–W——————————–200
—–X———————————500
—–Y———————————400
—–Z———————————350Selling Price per unit—-Material cost per unit—–Conversion cost per unit
———-$350————————–$120—————————-$40
———-$190————————–$95——————————$25
———-$270————————–$160—————————-$20
———-$215————————–$75——————————$35If the company is not able to increase the availability of machine C’s
operational hours, what is the production ranking of product Y?Options:
A. First
B. Second
C. Third
D. ForthThe correct answer is D (fourth)
——————————————————————————-
In the book it says that TPAR is not needed as they are all produced from same factory.
I thought I should add the conversion cost to the factory cost of $150,000
because each product would have different coversion cost per per hour.Is the conversion cost included in the factory cost of $150,000 ?
Thank you !
No you don’t include conversion costs!!!!
In throughput accounting, the focus is primarily on the variable costs, particularly the cost of materials. This approach assumes that in the short run, the only truly variable cost is the cost of materials.
Other costs, such as conversion costs (e.g., labour and overhead), are considered fixed or semi-fixed and are not directly factored into the throughput accounting calculations.
The rationale behind this is that conversion costs are often incurred regardless of the level of production or sales, and they are not directly affected by changes in throughput.Thank you for your detailed explanation!
But if you were to calculate TPAR, wouldn’t the conversion cost be included in the factor cost per hour along with direct labour, overheads and such?
As the products are all produced in the same factory the cost per machine hour will be the same across all the products so they can be ranked on their throughput return per machine hour (otherwise they should be ranked on their throughput accounting ratio).
Prod W
Prod rate ph. 200
Throughput pu 230
Throughput ph 46000Prod X
Prod rate ph. 500
Throughput pu 95
Throughput ph 47500Prod Y
Prod rate ph. 400
Throughput pu 110
Throughput ph 44000Prod Z
Prod rate ph. 350
Throughput pu 140
Throughput ph 49000Rank then in order of throughput ph
46000. 47500. 44000. 49000
W. X. Y. Z
3rd. 2nd. 4th. 1st
Here is another detailed answer.
Have you not watched our videos on throughput!
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