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Week 11: Creating Value II:
Managing Constraints
ACCT3012 Management Accounting B
Administrative update
Mid Semester Exam Review:
This Friday 17
th
October 2-4pm
Merewether Lecture Room 3
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Readings
Blocher, Chen, Cokins and Lin (2006) Cost Management: A
Strategic Emphasis (3ed) McGraw Hill. Chapter 3: Managing the
Costs of ConstrainedResources.
Bushong, J.G and J.C. Talbott (1999) An Application of the theory
of constraints. The CPAJ ournal, 67(1): pp. 53-55. , ( ) pp
Juras, P., Peacock, E. (2006) Applying Strategic Cost Analysis
Concepts to Capacity Decisions, Management Accounting
Quarterly, 8(1): pp. 24-35.
Kershaw, R. (2000) Using TOC to Cure Healthcare Problems,
Management Accounting Quarterly, 1(3): pp. 1-7.
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Learning Objectives
Refamiliarise yourself with the concepts: value chain, activity
management and how managing constraints can help create
value.
Understand the concepts underlying the Theoryof Constraints p y g y
(TOC).
Be aware of the differences between cost accounting and
throughput accounting.
Performkey steps and calculations using the TOC approach.
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Intro
Following on fromlast week:
Recall activities represent the building blocks of an
organisations (or an individuals) competitive advantage.
Product mix challenge: deciding on the right choice of
goods/services to provide, while balancing potential
constraints.
Can be influenced by: market, strategy, resources.
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Ask yourselves:
What is a constraint?
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Capacity constraints
Measures of capacity:
- Theoretical capacity maximum amount of productive capacity under
ideal conditions
- Practical capacity available productive capacity under practical
conditions
- Used capacity
- Excess capacity
Capacity constraints exist where capacity demand >practical
capacity
- Internal vs External constraints
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Lecture Example
The Icecreamists, London UK
The Kings of Ice Cream; the Masters of Controversy Evening Standard (sourced
http://www.theicecreamists.com/#/LickYourAddiction)
Baby Gaga ice cream
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Understanding the industry
Over six billion litres traded in 2008
Australian industry worth $2.2b, 3% growth (C&M 2013, IBISWORLD2013)
Popular with buoyant sales even through economic downturns
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Lets have a look at the MA side of things
$1.5/litre of milk
Bulla
Magnum
Frrrozen Haute Choc in NY Serendipity 3.
BabyG
On the subject of constraints
Internal constraints facing BabyGaga production?
External constraints?
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Not always a capacity issue
How you do things how activities are performed
Action controls attempt to regulate desired behaviour, but deviations can
occur
See for example:
Why is this a problem?
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The non-value of being stuck in traffic
Traffic congestion (estimated costs of $10b/annum or over $20b by
2020)
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Why does this occur?
Infrastructure capacity:
Too much demand
- Removal of 1% vehicles =18% faster traffic
However, J apanese research suggests capacity is not necessarily the only
bottleneck.
http://www.youtube.com/watch?v=Suugn-p5C1M
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What causes the bottleneck?
Managing the constraint:
- Action controls
- Self-driving cars?
- Business School news 14
th
October
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Now lets apply the Theory of Constraints
One way of managing product mix decisions
Decisions based on internal resource constraints
Basic principles:
- Organisations function as a system of activities or processes;
- Chain example;
- Whatever impedes system performance is a constraint, or bottleneck;
- Focuses on improving overall system performance by removing
constraints and strengthening each link.
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Throughput accounting (TA) and TOC
TOC is about the process of identifying and removing constraints that
affect the organisations performance, with the purpose of maximising
throughput
Throughput accounting defines:
Throughput:
rate at which $ is generated through sales - rate at which $ is generated through sales
- modified version of the contribution margin
Inventory:
- all purchases, investments that the organisation intends to sell
Operating expense:
- all other expenditure incurred to convert inventory into throughput
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TA VS CA
Traditional cost accounting prioritises (in order):
Operating expense Throughput Inventory
Throughput accounting prioritises (in order): g p g p ( )
Throughput Inventory Operating expense
TA recognises the need to balance the relationship between increasing TP
by incurring OE to convert INV
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TOC key steps
1. Identify the constraint
2. Exploit the constraint
- Use as effectively as possible; keep that process busy
3. Subordinate other processes linked to the constraint
- Synchronisation of the system
4. Elevate the constraint
- Consider ways to increase productivity, capacity e.g. BPR, outsourcing
5. Rinse and repeat
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Lecture Example
Apply the five focus steps to your daily life of balancing work, study and
life. For example, you may find transportation limits the time you have left
for other activities:
1. Identify constraint:
2 Exploit constraint: 2. Exploit constraint:
3. Synchronise activities:
4. Elevate constraint:
5. Repeat:
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A picture is worth more than 1000 words!
http://www.tocca.com.au/Services/demomanufacturing.htm
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Lecture Example
A: 20/hr B: 10/hr C: 14/hr D: 18/hr Total TP/hr =
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A: 30/hr B: 10/hr C: 20/hr D: 18/hr Total TP/hr =
A: 20/hr B: 20/hr C: 14/hr D: 18/hr Total TP/hr =
Lecture Example
2 products: P1 & P2
3 types of raw materials: A, B & C
3 production lines, 4 workers (W1-W4)
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No WIP inventories or setup times
Market demand for P1 is 20 units/day and P2 is 10
units/day.
The selling price for both P1 and P2 is $100/unit
Material cost: A ($40), B ($10), C ($20)
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Identify the constraint
Determine the most profitable product under:
- Traditional approach
TOC approach - TOC approach
Determine the optimal product mix
- Assume operating expense at $1,400
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1. Identify the constraint
Capacity utilisation
Worker P1 P2 Total
demanded
Total supplied
W1 300 --- 300 422
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W2 420
W3 421
W4 422
2. Traditional approach
Which product is more profitable?
P1 P2
Selling price $100 $100
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Material cost $ $
Throughput (CM) $ $
3. TOC approach
Which product is more profitable?
P1 P2
Selling price $100 $100
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Material cost $ $
Throughput (CM) $ $
Constraint (W2
time/product)
10 min 30 min
TP per constraint min $ $
4. Product Mix Calculation
TOC approach: Maximize product 1
Product 1:
- 20 @ 10 minutes each (W2) =>200 minutes =>220 minutes remaining
Product 2:
- 220 minutes @ 30 minutes each (W2) =>7 products
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Traditional approach: Maximize product 2
Product 2:
- 10 @ 30 minutes each (W2) =>300 minutes =>120 minutes remaining
Product 1:
- 120 minutes @ 10 minutes each (W2) =12 products
TOC Approach Traditional Approach
Sales revenue:
Product 1 20 X $100 $2,000 12 X $100$1,200
Product 2 7 X $100 $700 10 X $100$1,000
Raw material costs:
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Product 1 20 X ($50) ($1,000) 12 X ($50)($ 600)
Product 2 7 X ($30) ($ 210) 10 X ($30)($ 300)
Throughput $1,490 $1,300
Operating expense ($1,400) ($1,400)
Net profit (loss) $90 ($ 100)
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Food for thought
Consider the following applications:
- Infrastructure bottlenecks in developing countries
- The Fatberg
- International maritime trade ($5b loss in coal exports per annum)
- Accommodation for Big ships
- Barclays Premier League vs World Cup, Olympic performance
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