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Throughput

Throughput cost accounting technique involves 5 steps: 1) Determine total processing hours available 2) Identify the bottleneck activity that has the lowest production capacity 3) Calculate throughput contribution as selling price minus material costs 4) Calculate return per bottleneck hour by dividing throughput contribution by time to produce one unit for the bottleneck 5) Calculate conversion costs per hour by dividing total conversion costs by total hours or conversion cost per unit divided by hours per unit 6) Calculate the throughput accounting ratio (TPAR) by dividing return per bottleneck hour by conversion costs per hour.

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146 views

Throughput

Throughput cost accounting technique involves 5 steps: 1) Determine total processing hours available 2) Identify the bottleneck activity that has the lowest production capacity 3) Calculate throughput contribution as selling price minus material costs 4) Calculate return per bottleneck hour by dividing throughput contribution by time to produce one unit for the bottleneck 5) Calculate conversion costs per hour by dividing total conversion costs by total hours or conversion cost per unit divided by hours per unit 6) Calculate the throughput accounting ratio (TPAR) by dividing return per bottleneck hour by conversion costs per hour.

Uploaded by

ruva
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Throughput cost accounting technique

Answering a question
Step 1
Determine the total processing hours available in the factory or department
E.g.
Hours per day x days per week x weeks per year (X no of employees or machines; if
more than 1)

Step 2
Determine the bottleneck activity
i) Calculate maximum production capacity for each product using the total
hours (calculated in step 1) divided by hours to produce 1 unit/ product.

ii) The product with the lowest capacity is the bottle neck.

From step 3 onwards we use the bottleneck resource data only.

Step 3
Calculate throughput contribution
Selling price – Material costs
NB: Throughput is defined as sales less material costs whereas contribution is
defined as sales less all variable costs. Throughput assumes that all costs
except materials are fixed in the short run.

Step 4
Calculate Return per bottleneck hour
Divide Throughput contribution by Time to produce 1 unit of the bottleneck resource

Step 5
Calculate Conversion (Factory) costs per hour
If information is expressed as annual costs then;
Total conversion costs divided by Total hours (calculated in step 1)

If information is given as a cost card i.e. is expressed in terms of 1 unit then;


Conversion costs per unit divided by hours to produce one unit.

Step 6
Calculate TPAR (Throughput accounting ratio)
Return per bottleneck hour divided by Conversion (factory) costs per hour
Question
Chloe’s Cakes
Chloe’s Cakes make three different types of cake, Birthday, Christmas and Wedding.
Each cake goes through three processes, mixing, baking and icing. Like many
businesses Chloe’s faces tough competition from a mature market place.

The cake factory has 20 production lines which cover the three process. The
processing capacity varies for each process and the manager has provided the
following details:
Processing time per cake in hours
Birthday Christmas Wedding
Mixing 0.4 0.8 1.5
Baking 1.0 1.5 1.6
Icing 0.8 1.0 1.5

The cake factory is open for 12 hours a day for six days per week. The factory closes
down for one week in the summer and one week at Christmas. Labour is paid at
£7.50 per hour. Raw materials cost £5.00 for the birthday cake, £10.00 for the
Christmas cake and £20.00 for the wedding cake. Other factory costs (excluding
labour and raw materials) are £200,000 per year. Selling prices are £20 for the
birthday cake, £25.00 for the Christmas cake and £80.00 for the wedding cake.
Due to the perishable nature, Chloe’s carries very little inventory.

Required
(a) Identify the bottleneck process and explain why this process is described as a
bottleneck. (3 marks)
(b) Calculate the throughput accounting ratio (TPAR) for each product (assuming the
bottleneck is fully utilised). (8 marks)
(c) Explain how Chloe’s could improve their TPAR (4 marks)
(d) Should Chloe’s discontinue making Christmas cakes? (5 marks)

Total (20 marks)

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