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A company manufactures several products. One of them has a selling price of $60 per unit; material costs of $15 per unit; and labour costs of $10 per unit. The labour budget for the years is 100,000 hours at a cost of $5 per hour. The machine time for this product is budgeted at 0.2 hours per unit, and it is machine time that is the bottleneck resource with a total of 5,000 hours available per year. Factory overheads are $250,000 per year.
What is the throughput accounting ratio for this product?
A. 4.50
B. 1.17
C. 0.67
D. 1.50In arriving at the answer, the labour budget for the year ($500,000) was used to calculate the factory cost. Why wasn’t the labour cost per unit ($250,000) used instead since the bottleneck resource in this question is the machine time and that determines the rest of the activities that would occur?
In throughput accounting the factory cost is all costs apart from the cost of materials, and so is the total of the overheads and the labour.
The labour and overheads are regarded as being fixed in total (as they are likely tone in the short-term) and so are the totals budgeted regardless of how many units actually end up being produced.I do explain both of these points (and the reasons) in my free lectures on throughput accounting. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well 🙂
Thanks for your response John, and thanks for the free lectures. Indeed, I only attempted the questions after studying with the lectures and lecture notes. I just didn’t understand why I had to use the budgeted labour hours. Thanks anyway.
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