Throughput accounting – ACCA Performance Management (PM)
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Why can’t anybody else explain it as simple as he does?
Thanks a lot
Hello sir,
Why did you have to exclude materials cost from the factory cost, when calculating cost per factory hour
Because, as explaining in the lecture, it is only the material cost that is treated as being a variable cost. all the other costs are regarded as being fixed in the short-term and it is these that are called the factory cost.
Dear Sir, I tried to ask the question in ask the tutor section but there was a problem. My question is why won’t you deduct the OTHER VARIABLE COSTS to get the throughput in example number 2 of throughput accounting? As it is mention that it is variable. Won’t we need to deduct all the variable costs? Thanks Sir.
It is clear now. Sorry, I did not read the question properly earlier, but after reading it again, it is clear now. I don’t know how to delete the comment so I am posting It here.
Hi John,
In the Kaplan Exam Kit, at the throughput accounting exercises the answer says “if none of the processes are limited [i.e. bottleneck], then increasing demand would improve throughout.” (Q59)
Can you please explain the logic behind?
since there is no bottleneck we can produce as much as we want therefore if the demand were to go up we would be able to gain more contribution thus increasing the overall throughput
Sir, why did we put 10,000 units of B (instead of 8,000 units) when we calculate fixed cost in throughtput to get in maximum profit? There were only 8,000 units of product B we have got in optimal plan.
I do explain the reason in the lecture!! The total fixed costs stay constant (by definition) and so the total is as was originally budgeted and does not change with the actual level of production.
Sir, why did we put 10,000 units of B (instead of 8,000 units) when we calculate fixed cost in throughtput after ranking process? There were only 8,000 units of product B we have got in optimal plan.
Sir, today was an exam, and in part C there was a question, to define limiting resource and define optimal production plan.
And the second part was to analyze make or buy decision.
so, the first part of this task. Should it be calculated according to throughput accounting where Contribution is sales – materials?
thank you in advance!
It sounds more like linear programming, but I cannot say without having seen the question.
Hello sir!
Could you please explain the moment in the example 2 with other variable costs. It is a little it confusing because they call it variable costs and according to throughput accounting we assume that the only variable costs is materials. Could there be a situation when by meaning variable costs they really mean it is variable cost and we should bear it in mind. Or in the end it doesn’t really matter for us when using throughput?
thank you in advance
For throughput costing all costs other than materials are treated as being fixed costs, as I do explain the lecture.
This makes no sense to me at all.
A: 100 sales price, 50 material = 50 contribution / 1 hour = 50
B: 100 sales price, 60 material = 40 contribution / 1 hour = 40
So we would assume lets produce A, right?
Except, A has other costs of 40, so profit per unit is 10 while B has 20 other costs so we are making 20 profit per item.
I would understand if we just used total cost – materials, but using sales price is totally twisted in my mind.
May peace be upon you sir! How can we reduce total factory cost if they were fixed?
Fixed costs are only fixed in the sense that they do not change with the level of production. That does not mean that they can not be changed for other reasons – for example they might increase simply due to inflation, or we might be able to reduce them by using different suppliers.
Hello Sir,
If we have more than two products when allocating resources, say three products, do we allocate maximum resources (Based on demand) for product A and Product B and the remaining resources for Product c?
Thank you.
You allocate to the products in the order of their throughput returns per unit of the limited resource. The final product will get whatever resources are left over.
Hey Sir, how do we know which to use between throughput and contribution of the question doesn鈥檛 state?
If throughput accounting is required then the question will say so. If the question does not say so then it is normal key factor analysis.
thankyou sir as always. i dont get the cocept of taking labour and other variable cost as fixed cost? and why we dont calculate cost per factory for individuals? if one of the tpr is less than one and the others product greater than one in the same factory cant we say the factory is profitable?
As I do explain in the lecture, in practice all costs (apart from materials) are likely to be fixed in the short-term. Calculating the factory cost per individual would be of no use. We calculate the return per hour for each product and the cost per hour in the factory. It is relevant when there are a limited number of factory hours available so that we can decide which products should be made in order to maximise profits.
please why is WIP valued at material cost in Throughput Accounting?
Because all other costs are assumed to be fixed.
,Thank you so much for these free lectures, notes, videos and MCQ’s. This is my very first time to use them and hope I do well in the exam this December 2021.
Hello Sir! Can you please tell me why haven鈥檛 have we taken cost per factory hour for individual products (by dividing the total factory cost for a product by machine hours) instead of the whole costs and then find the T.A.R. for individual products?
Thank you in advance!??
It is because all of the products are being made in the same factory.
Thank you Sir!
You are welcome:-)
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Thank you for your comment 馃檪
Hail Sir John !