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throughput accounting

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › throughput accounting

  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • November 26, 2021 at 9:47 am #641683
    AshleyMarc1997
    Member
    • Topics: 48
    • Replies: 24
    • ☆☆

    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——————————–W——–X——–Y——–Z
    Production rate/machine hrs—–200——500—-400—–350
    Selling price per unit ($)———–350——190—-270—–215
    Material cost per unit ($)———-120——-95—–160——75
    Conversion cost per unit ($)——-40——-25——20——-35

    If the company is not able to increase the availability of machine C’s
    operational hours, what is the production ranking of product Y?

    A. First
    B. Second
    C. Third
    D. Forth

    [My answer]
    The company uses machine C which is operational for 5 hours a day to make four products W, X, Y, Z. So every product is taking 5 hours to produce the products.

    Products———————————–W———X———-Y———-X
    Production units————————200——-500——400——-350
    Total Throughput cost ($)———-46000—-47500—44000—-49000
    Total Machine hours—————–1000——2500—–2000—–1750
    Throughput cost / machine hours–46———19——–22———28
    Ranking———————————-1st———4th——-3rd——–2nd

    According to my answer product Y should be made 3rd in ranking but the correct answer is D (4th).

    Please explain why my answer is not correct???

    November 26, 2021 at 3:54 pm #641709
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51585
    • ☆☆☆☆☆

    It is not how many they produce that matters, it is the speed at which they produce.

    The throughout return for W is 350 – 40 = $280.
    They can produce at the rate of 200 per hour, and so the throughput return per hour is 200 x $280 = $56,000.
    (Or, if you prefer, the time to produce 1 units is 1/200 hours, and therefore the throughput return is 280 / (1/200) = $56,000.

    It is the same workings for each other the other products.

    Have you watched my free lectures on throughput accounting?

    November 26, 2021 at 4:43 pm #641723
    AshleyMarc1997
    Member
    • Topics: 48
    • Replies: 24
    • ☆☆

    Sir, you have deducted the conversion cost from the selling price instead of material cost to get the throughput return for W. It should be this way 350 – 120 = $230

    The company produced 200 units for W, therefore the throughput return is 200 x $230 = $46,000. (which I correctly calculated in my answer above)

    Since the machine is used for 5 hours a day, we need to calculate the total hours taken by W as 200 x 5 hrs = 1000

    Therefore, the throughput return per hour for W is calculated as ($46000 / 1000 hrs) = $46

    The same goes for the other products. (Is that correct?)

    November 27, 2021 at 8:31 am #641762
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51585
    • ☆☆☆☆☆

    Sorry, my mistake – you are correct that I should have subtracted the material cost.

    The fact that the machine is used for 5 hours a day is not relevant. To get the throughput return per hour we need to divide the throughput contribution per unit by the time taken per unit (as I explain in my lectures on this).

    We is capable of producing 200 units per hour, and therefore the throughput return per hours is 200 x $230 = $46,000. That is the return per hour – we do not multiply that by anything.

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