Throughput accounting

There is a free lecture on here which explains throughput accounting and works through examples. I suggest that you watch it. You cannot expect me to type out the lecture here!!

Dear John, thank you for all your lectures - I find them really helpful! I have a question - did not understand the following question: >>> One of the products manufactured by a company is Product X, which sells for $40 per unit and has a material cost of $10 per unit and a direct labour cost of $7 per unit. The total direct labour budget for the year is 50,000 hours of labour time at a cost of $12 per hour. Factory overheads are $2,920,000 per year. The company is considering the introduction of a system of throughput accounting. It has identified that machine time as the bottleneck in production. Product X needs 0.01 hours of machine time per unit produced. The maximum capacity for machine time is 4,000 hours per year. What is throughput accounting ratio for Product X? >>> MY QUESTION: >>> If 400,000 units of X can be produced (4000 hours / 0.01 hour of machine time per unit produced), total labour costs = 400,000 * $7 = $2,800,000. But question states that total direct labour budget is 50,000 labour hours x $12 = $600,000, which is a way less than what is needed to produce 400,000 units of X (=$2,800,000 calculated above by me). Thus the bottleneck seems to be the total direct labour hours, NOT machine time. Why question states that machine time is the bottleneck? In further calculations of T.A.R, they show that factory cost per bottleneck hour ($2,920,000 + $600,000)/4,000 - but why they don't consider $2,800,000 calculated above? >>> Thank you, John for your attention!

It is difficult for me to be certain without seeing the actual question (if it is a BPP question or from a real past exam, then let me know and I will look at it). However, for the first part of the question, do appreciate that Product X is only one of the products that they are producing. The same machine will be being used for all of their products - not just for Product X, and you should therefore use machine time as the bottleneck as the question tells you to. The same really applies to the second part of your question. Just as the total machine time will not all be spent on Product X, similarly the total labour budget will not be being spent all on Product X. So the answer they have is correct - factory overheads, plus total labour (50,000 x $12).

Dear John, thank you very much for your reply! Not it is clear to me. Yes, it from BPP Revision Kit for 2014-15 (Question #3.7).

I assume (hope!) that you mean "now it is clear to me" :-)

Yes, John! Sorry, I meant "NoW" of course. :-)

Great :-)

Hi John, I have a query re throughput from BPP question bank. The question was as follows: Budget information relating to a company that manufactures four products is as follows. Product Max Sales Max hrs Max machine Sales price Material cost Factory cost Demand per unit hrs required per unit per unit per unit Units $ $ $ A 1000 0.1 100 15 6 5 B 500 0.2 100 21 10 8 C 2000 0.3 600 18 9 6 D 1000 0.2 200 25 16 7 Only 750 machine hours are available during the period. Applying the principles of throughput accounting, how many units of B should be made if the company produces output to maximise throughput and profit? The book answered the question by ranking the the products with throughput accounting ratio. However, I ranked them by Throughput per machine hour. why does the ranking become different. Should both of them give you the same ranking? Thank you in advance.

They will both give them same ranking (I don't know if you have watched the free lectures, but I make this point in the lecture). It is because the throughputs per hour should all be divided by the same cost per hour to get the TPAR. If BPP have got a different ranking, then they are wrong (unless there is something else in the question which I am not aware of because you have not typed it).

Nah, I've typed it all. Thank you for the clarification :)

You are welcome :-)

Sorry, but we cannot handle questions by email. Post it in this forum and then I will try and help :-)