CIMA P2 Syllabus A. Managing The Costs Of Creating Value - Throughput Accounting - Notes ^{4 / 10}

Throughput = Revenue – Direct Materials

The Theory Of Constraints

1. Identify the system’s bottleneck

2. Decide how to exploit the system’s bottlenecks

   Ensure the bottleneck resource is actively being used as much as possible

3. Subordinate everything else to the decisions made in Step 2

   Go at the speed of the bottleneck
    
   Idle time is unavoidable and needs to be accepted if the theory of constraints is to be successfully applied.

4. Elevate the system’s bottlenecks

   This will normally require capital expenditure.

5. If a new constraints is broken in Step 4, go back to Step 1

   The likely constraint in the system is likely to be market demand.

Three Important Ratios

• Throughput (return) per factory hour
              
  Throughput per unit
  ------------------------------------------------
  Product’s time on the bottleneck resource

• Cost per factory hour
                        
  Total Factory Cost
  -------------------------------------------------
  Total time available on bottleneck resource

  The cost per factory hour is across the whole factory and therefore only needs to be calculated once (not for each product).

• Throughput accounting Ratio

  Return per factory hour
  ---------------------------
  Cost per factory hour

TPAR more than 1 would suggest that throughput exceeds operating costs so the product should make a profit.

Priority should be given to the products generating the best ratios.

TPAR less than 1 would suggest that throughput is insufficient to cover operating costs, resulting in a loss.

Criticisms of TPAR

1. It concentrates on the short-term

2. It is more difficult to apply throughput accounting concepts to the longer term when all costs are variable

3. In the long run, ABC might be more appropriate for measuring and controlling performance