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This question starts with:
One of the products manufactured by a company is Prod.X, which sells for $40 per unit and has a mat.cost of $10 per unit and dir.lab cost of $7 per unit…Hope you can find it.
They ask for TA ratio, answer 3.41.I don’t understand why dir. labor cost of $7 is not used for TFC calculation?
Just dir.lab.budget x cost per h (50.000*$12).Thank you in advance.
Do you mean one of the mock exams in the Revision Kit?
If you do then please say which exam (there are three of them) and which question (because I cannot see the question you are referring to).
If it is not one of those in the Revision Kit, then I do not have any other BPP mock exams.In calculating the throughput contribution we only ever take selling price less materials. We assume that all other costs are fixed in the short-term.
You really need to watch the free lecture on throughput accounting.
Our free lectures are a complete course for Paper F5 and cover everything needed to be able to pass the exam well.Sorry, I meant MCQ in BPP.
I have old BPP (up to June 2015, and here this is 3.7 question).
I did watch lectures, but this question makes confusion for me(how they calculate TFC).This is the whole question:
One of the products manufactured by a company is Prod.X, which sells for $40 per unit and has a mat.cost of $10 per unit and dir.lab cost of $7 per unit.The total dir.lab.budget for the year is 50.000 h of lab.time at cost of $12 per h.FO are $2.920.000 per year.
The comp. is considering the introduction of a system of TA.It has identified that mach.time as bottleneck in production.Product X needs 0.01 h of mach.time per unit produced. The max capacity for machine time is 4.000 h per year.TA ratio=?Calculation for TFC is=2.920.000+(50.000*12)
Info about lab cost per unit of $7 is not used anywhere in answer.
This I don’t understand why.Thank you in advance,
The $7 is the labour cost per unit. Since the labour cost is $12 per hour, it must mean that each unit is taking 7/12 of an hour for labour.
It is only the total labour cost to the firm (5,000 hours at $12 per hour) that is relevant in calculating the total factory costs.
Sir, I don’t understand how machine time is the bottleneck in the production:
Total Machine hours available = 4000 hours
Machine time per unit = 0.01 hr
So, number of units that can be produced = 4000/0.01 = 400000 units.Total labour hours = 50000 hrs
Labour time per unit = 7/12 = 0.583 hr
So, number of units that can be produced = 50000/0.583 = 85714 units.According to the number of machine hours available, 400000 units can be produced, while with the number of labour hours available, only 85714 units can be produced.
So, doesn’t it mean that the labour time is the bottleneck, NOT the machine time.** I see that they are “Budgeted” labour hours, and it means that labour hours are not limited to 50000 hrs. But, they can be varied to increase production up until 400000 units.
Also, if they are capable of producing 400000 units with 4000 machine hrs, why would they only budget 50000 labour hrs, with which they would only be able to produce 85714 units. Please help me understand.
Thanks.
Samit: The information only relates to one of the products – they are almost certainly producing several products.
We do not know how many units of each product they have currently budgeted on producing, and that is not relevant.
They are thinking of using throughput accounting, and simply want to know what the TA ratio is for this particular product.Labour is never a bottleneck in throughput accounting – only machine time.
(If labour were limited as well, it would no longer be a throughput accounting problem, but a linear programming problem)Ok, got it! Thankyou 🙂
Sir, as you mentioned labour is never a bottleneck in Throughput Accounting; is it because direct labour costs are fixed costs in the short-term?
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