Throughput

ACCA F5 - Performance Management 

I remember, somewhere in an article I read that all cost are variable in long run. (Fixed costs, which are uncontrollable in short period of operation transform to variable costs and are controllable in long run). Is the opposite true? Do all variables turn to fixed in very short period of production? Let us visit key assumptions of throughput accounting.

KAPLAN PAPER F5 (ACCA) PERFORMANCE MANAGEMENT

Assumption of throughput accounting:

Ø  The only totally variable cost in the short-term is the purchase cost of raw materials that are bought from external suppliers. (Throughput accounting aims to make the best use of a scare resource (bottleneck) in a JIT environment.)

Ø   Direct labour costs are not variable in the short-term. Many employees are salaried and even if paid at a rate per unit, are usually guaranteed a minimum weekly wage.

Throughput = Sales revenue - Direct material cost

Every time I visit this particular topic, it reminds me of two interesting articles by Ann Iron. Below, I provide you with the links if, you would like you to go through these articles. Reading these two articles increased my curiosity to read 'THE GOAL' (a management-oriented novel by Dr. Eliyahu M. Goldratt) and I scheduled to read this book. Slowly and steady with long hour's breaks in between, it nearly took me a week to go through whole book. I suggest you to go through the book if you like to. Believe me, it reading.

Understanding bottleneck is important to understanding throughput. Scarce resources limit/reduce output (productivity) to the production level that is equal to the optimal utilization of that resource. One or several bottlenecks can exist in production process but one which limit output to greater extent, the earlier it is recognised. Once remedies are implemented for higher ranked bottleneck, effect of another bottleneck in the lower rank is accounted consecutively. In situations, where bottleneck exist throughput can be calculated using following formulas.

Throughput per unit of  bottleneck resource	Throughput/ bottleneck resource consumed per unit of production
Cost per bottleneck resource	Total factory cost/Total bottleneck resource time available
Throughput accounting ratio	Return per unit of bottleneck resource/cost per bottleneck resource

ACCA Article: Throughput accounting and the theory of constraints, part 1

ACCA Article: Throughput accounting and the theory of constraints, part 2