Syllabus A.

Throughput Accounting

1.Just-In-Time System

Q1. C: 1 and 3

Q2. B: 2 only

Q3. C: 1, 2 and 3

2.Throughput

Q4. A: sales revenue less direct materials costs

Q5. D: $8

Workings:
Throughput = Selling Price Direct Material Cost
= $10 - $2 = $8

Q6. A: $21,300

Workings:
Throughput = Selling Price Direct Material Cost
Direct Material Cost = Selling Price Throughput
= $85,000 - $63,700 = $$21,300

3.Theory of Constraints

Q7. C: 1, 2 and 3

Q8. C: 1 and 2

Q9. Past Paper: Q2 - December 2014

Total salon hours in a year = 8 hours x 6 days x 50 weeks = 2,400 hours per year

Capacity of Assistants:

No. of cuts per year = (2,400 hours / 0.1 hours per cut) x 2 assistants = 48,000 cuts per year
No. of treatments per year = (2,400 hours / 0.3 hours per treatment) x 2 assistants = 16,000
treatments per year

Capacity of Senior Stylists:

No. of cuts per year = (2,400 hours / 1 hours per cut) x 3 senior stylists = 7,200 cuts per year

No. of treatments per year = (2,400 hours / 1.5 hours per treatment) x 3 senior stylists = 4,800
treatments per year

Capacity of Junior Stylists:

No. of cuts per year = (2,400 hours / 0.5 hours per cut) x 2 junior stylists = 9,600 cuts per year

No. of treatments per year = (2,400 hours / 0.5 hours per treatment) x 2 junior stylists = 9,600
treatments per year

Since the total number of cuts and treatments which can be completed by the senior stylist is less
than the number which can be completed by the other staff members, the senior stylists time is the
bottleneck activity.

Q10. Past Paper: Q1a June 2009

The total processing hours of the factory is given but can be proven as follows:
18 hours x 5 days x 50 weeks x 50 production lines = 225,000 hours.

Given this, the production capacity for pressing must be 225,000 hours/05 hours per metre =
450,000 metres. Using this method the production capacity for all processes is as follows:

Product A Product B Product C

Pressing 450,000 450,000 562,500
Stretching 900,000 562,000 900,000
Rolling 562,500 900,000 900,000

The bottleneck is clearly the pressing process which has a lower capacity for each product. The
other processes will probably be slowed to ensure smooth processing.

Clearly an alternative approach is simply to look at the original table for processing speed and pick
out the slowest process. This is pressing. (full marks available for that explained observation)

Q11. C: a bottleneck operation.

Q12. B: False
4.Theory of Constraints

Q13. B: direct material cost.

Q14. A: direct materials.

Q15. A: True

Q16. Past Paper: 9MC Pilot (pre 2007)

A: 1.33

Throughput (return) per factory hour = ($130 - $50) = $20

4 hours

Cost per factory hour = ( $20 + $40) = $15

4 hours

Throughput accounting Ratio = $20 = 1.33

$15

Q17. Past Paper: Q2 - December 2014

TPAR for Cuts:

Return per factory hour = ($60 - $0.60) = $59.40

1 hour

Cost per factory hour = (3x$40,000 + 2x$28,000 + 2x$12,000 + $106,400) = $42.56

7,200 hours

Throughput accounting Ratio = $59.40 = 1.4

$42.56
TPAR for Treatments:

Return per factory hour = ($110 - $7.4 - $0.60) = $68

1.5 hours

Cost per factory hour = (3x$40,000 + 2x$28,000 + 2x$12,000 + $106,400) = $42.56

7,200 hours

Throughput accounting Ratio = $68 = 1.6

$42.56

Q18. Past Paper: Q1b June 2009

TPAR for Product A:

Return per factory hour = ($70 - $3) = $134

0.5 hours

Cost per factory hour = ($18,000,000 + $10x225,000hours) = $90

225,000 hours

Throughput accounting Ratio = $134 = 1.49

$90

TPAR for Product B:

Return per factory hour = ($60 - $2.5) = $115

0.5 hours

Cost per factory hour = ($18,000,000 + $10x225,000hours) = $90

225,000 hours

Throughput accounting Ratio = $115 = 1.28

$90
TPAR for Product C:

Return per factory hour = ($27 - $1.8) = $63

0.4 hours

Cost per factory hour = ($18,000,000 + $10x225,000hours) = $90

225,000 hours

Throughput accounting Ratio = $63 = $0.7

$90

Q19. Past Paper: Q2a December 2013

TPAR for Large Panels:

Return per factory hour = ($12,600 - $4,300) = $5,928.57

1.4 hours

Cost per factory hour = $12,000,000 = $4,444.44

12 x 5 x 50 x 90% hours

Throughput accounting Ratio = $5928.57 = 1.33

$4,444.44

TPAR for Small Panels:

Return per factory hour = ($3,800 - $1,160) = $4,400

0.6 hours

Cost per factory hour = $12,000,000 = $4,444.44

12 x 5 x 50 x 90% hours

Throughput accounting Ratio = $4,400 = 0.99

$4,444.44
In any organisation, one would expect the throughput accounting ratio to be greater than 1. This
means that the rate at which the organisation is generating cash from sales of this product is
greater than the rate at which it is incurring costs. It follows on, then, that if the ratio is less than 1,
changes need to be made quickly. Whilst the ratio for large panels is more than 1, it is just under 1
for small panels. However, if changes are made as suggested in (c) below, this could soon be
rectified.

Q20. B: False

Q21. Past Paper: Q1c June 2009

(i) Yam could improve the TPAR of product C in various ways:

Speed up the bottleneck process.

By increasing the speed of the bottleneck process the rate of throughput will also increase,
generating a greater rate of income for Yam if the extra production can be sold. Automation might
be used or a change in the detailed processes. Investment in new machinery can also help here
but the cost of that would need to be taken into account.

Increase the selling prices.

It can be difficult to increase selling prices in what we are told is a competitive market. Volume of
sales could be lost leaving Yam with unsold stock or idle equipment. On the other hand, given the
business appears to be selling all it can produce, then a price increase may be possible.

Reduce the material prices.

Reducing material prices will increase the net throughput rate. Metal is available from many
sources being far from a unique product. Given the industry is mature the suppliers of the raw
material could be willing to negotiate on price; this could have volume or quality based conditions
attached. Yam will have to be careful to protect its quality levels. Bulk buying increases stock levels
and the cost of that would need to be considered.

Reduce the level of fixed costs.

The fixed costs should be listed and targets for cost reduction be selected. ABC techniques can
help to identify the cost drivers and with management these could be used to reduce activity levels
and hence cost. Outsourcing, de-skilling or using alternative suppliers (for stationery for example)
are all possible cost reduction methods.

(ii) A TPAR of less than one indicates that the rate at which product C generates throughput (sales
revenue less material cost) is less than the rate at which Yam incurs fixed cost. So on a simple
level, producing a product which incurs fixed cost faster than it generates throughput does not
seem to make commercial sense. Clearly the TPAR could be improved (using the methods above)
before cessation is considered any further.

However, cessation decisions involve consideration of many wider issues (only three required).
Long-term expected net cash flows from the product allowing for the timing of those cash
flows (NPV) are an important factor in cessation decisions.
Customer perception could be negative in that they will see a reduction in choice.
Lost related sales: if product C is lost will Yam lose customers that bought it along with
another product?
What use could be made of the excess capacity that is created.
 Throughput assumes that all costs except raw materials are fixed; this may not necessarily
be the case and only avoidable fixed costs need to be taken into account for a cessation
decision. If few fixed costs can be avoided then product C is making a contribution that will
be lost if the product ceased.

5.Throughput Accounting in Multi-Product Situations

Q22. Past Paper: Q2bc December 2013

(b)

Product No.of units Hours per Total hours Throughput Total

unit per hour Throughput
Small panels 1,000 0.6 600 $4,400.00 $2,640,000
Large panels 1,500 (W1) 1.4 2,100 $5,928.57 $12,449,997
Total 2,700 $15,089,997
Less: Factory ($12,000,000)
Costs
Profit $3,089,997

Working 1:
No. of units = (2,700-600)/1.4 = 1,500

(c) Increasing throughput

Generally speaking, throughput can be increased by increasing sales volumes or prices on the one
hand, or by cutting costs on the other hand. In the case of S Co, it is not possible to increase sales
prices as the company has guaranteed not to increase them for three years. From our answer to
(b) above, we can see that S Co has unsatisfied demand for both small panels and large panels.
There are customers out there who the company is unable to supply because of its restricted
machine capacity. Therefore, it would be worthwhile for S Co to focus on increasing production
volumes and thus sales volumes.

In order to increase production volumes without making any additional capital expenditure, the
company needs to focus on how it could increase the productivity of Machine M. We are told that
there is plenty of spare capacity on Machines C and A. Some suggestions to increase Machine Ms
capacity are as follows:
Machine M is currently only fully functional 90% of the time. This means that 300 hours of
time are lost whilst the machine is being maintained or workers are not available to man it.
If the maintenance work could be carried out outside the usual working day (i.e. either
before 7 am or after 8 pm), some additional time could be freed up. This should be possible
given that we are told that the maintenance contractors work around the clock.
Workers could be trained to use more than one of the machines. This would then mean
that, if some workers were absent, one of the other workers could step in and work on
another machine in order to keep it running. Again, this would help to keep the lost 300
hours productive.
The most obvious machine time which is being lost is the one hour per day at lunchtime.
This amounts to 250 lost production hours per year. These additional 250 hours could be
 used to produce an extra 178 large panels (250/14 hours.) Large panels should be made
first in preference to small panels since they generate a higher throughput per machine
hour. If workers were trained to use all three machines then, if their lunchtimes were
staggered, it may be possible to keep machine M running for the whole working day.
However, even after doing this, there would still be 590 additional hours of time required on
Machine M if the full market demand is going to be satisfied. Therefore, more time needs to
be made available.
Finally then, in order to increase productive hours on M, the working hours of the factory
would need to be increased. Either the working day could be made longer, given that
workers must already be working shifts, or maybe the factory could open for one extra day
per week.