F5 a throughput2015

Anisah M&Tew You Hoo/Throughput 1

WHAT YOU NEED TO MASTER

HOW TO Calculate TPA ratio Suggest HOW TO IMPROVE TPA ratio APPLY TO MULTI PRODUCT SITUATION-

LIMITING FACTOR OTHERS…..

What is throughput Theory of constraint STEPS TO ELIMINATE bottleneck Bottlenecks YAM,THIN CO examples FLOPRO etc


THROUGHPUT ACCOUNTING(TA)

• TA has been developed from THEORY OF CONSTRAINTS (TOC) as an alternative system of cost & management accounting in a JIT environment.

• Aim – to maximise sales revenue less material cost, whilst reducing inventory & operating expenses


THEORY OF CONSTRAINT

TOC is production management approach IT AIMS to maximise throughput contribution THROUGHPUT CONT = (sales revenue - material cost) IT AIMS TO MAXIMISE TPUT while keeping conversion cost (all

operating except material costs) & investment cots (inventory & equipment) to minimum.

A strategy to throughput contribution is accepted if in conversion & investment costs is lower.

It focuses on bottlenecks . Bottlenecks are CONSTRAINT to throughput

maximisation. Bottleneck is an activity within the organisation where

demand for that resources MORE THAN its capacity to supply (limiting factor).


THEORY OF CONSTRAINT (cont) One process will act as a bottleneck or limiting factor &

constrain throughput. This is known as the binding constraints in TOC.

Output through the binding constraint should never be delayed as this leads to lost sales.

To avoid this happening a buffer inventory should be built up immediately prior to bottleneck.

Operations prior to bottleneck should operate at same speed as bottleneck, otherwise WIP (other than than the buffer inventory) will be built up.

Inventory is not desirable as it costs money in terms of storage & interest costs.

TOC introduced the 5 step approach to bottlenecks TOC promotes the use of throughput accounting (TA)

FIVE-STEP APPROACH TO KEY STAGES OF TOC

Step 1 - Identify the constraint (bottleneck)

Step 2 - Decide how to exploit the constraint Make the best use of bottleneck resource. Rank the products based

on throughput return per limiting factor. Bottleneck process should focus on money making products. Other

tasks pass to other equipment.

Step 3 - Subordinate & synchronise everything else to the decisions made in step 2

Ensure other processes does not pressurize the bottleneck process Allow non bottleneck process to have idle time rather than producing

products for inventory Release work from bottleneck process so that it could focus on

revenue generating activities Try to find measures which are cost free & resources which are

readily available.


FIVE-STEP APPROACH TO KEY STAGES OF TOC

Step 4 - Elevate the performance of the constraint• Once all available & free resources and effort have been

put in place to support bottleneck process, then only consider the need to spend to elevate the bottleneck. This may involve buying new equipment, etc.

Step 5 - If the constraint has shifted during any of the above steps, go back to step 1. Do not allow inaction to cause a new constraint.



THROUGHPUT ACCOUNTING

TA is an approach to accounting which is in sympathy with JIT.Goes very well with JIT

Product costs relates to key resources used by the products.

Purchased materials & components must be processed to generate sales.

Maximum amount of throughput is required with the financial definition:Sales – Direct Materials Costs


TA For JIT Is Based On 3 Concepts

1. In short run it is more useful & simpler to consider entire costs excluding materials, as fixed & these costs are grouped together & called total factory costs.

2. In a JIT environment, zero inventory is ideal Profit is a function of time taken for co to respond to needs of market.Products should not be made if there is no demand.Unavoidable idle capacity is acceptable, except if in the BOTTLENECK operation.


TA For JIT Is Based On 3 Concepts (cont)

3. Profitability is determined by the rate at which products contributes money

In a JIT system, this depends on the speed at which goods can be produced & delivered to customers.


THROUGHPUT ACCOUNTING Principle behind it is that all costs other than

material are effectively fixed.

Throughput is dependent on 4 elements: Unit SP Sales volume Purchase price of material Speed of usage of direct material

11

RECAP AGAIN …5 STEPS IDENTIFY THE BOTTLENECK EXPLOIT THE BOTTLENECK

Organizations “exploit” the constraint by utilizing every bit of the bottleneck component without committing to potentially expensive changes and/or upgrades.

Let the bottleneck component focus on moneymaking pdts only. Let other process takeover unimportant task currently done by bottleneck process.

SUBORDINATE EVERYTHING ELSE TO THE BOTTLENECK PROCESS With a plan in place for exploiting the constraint, the organization adjusts the rest

of the system to enable the constraint to operate at maximum effectiveness. Slow down other process so as not to add pressure to bottleneck process

ELEVATE THE CONSTRAINT At this point, the organization elevates the constraint by taking whatever action

needed to eliminate it permanently. May involve major changes to the existing system, such as reorganization,

divestiture, or capital improvements. Since these typically require a substantial up-front investment, the organization should be certain that the constraint cannot be improved from Steps 1 through 3.Anisah M&Tew You Hoo/Throughput


CONVENTIONAL COST THROUGHPUT ACCOUNTING ACCOUNTING

Inventory is an asset

Costs can be classified as direct or indirect

Product profitability can be determined by deducting a product cost from SP

Profit can be increased by reducing cost elements

Inventory is a result of unsynchronised manufacturing & is a barrier to making profit

Such classifications are no longer useful

Profitability is determined by rate at which money is earned

Profit is a function of material cost, total factory cost & throughput


TRADITIONAL THROUGHPUT PRODUCT COSTING ACCOUNTING

Labour costs & traditional V OH are treated as VC

Inventory is valued in income statement & B/S at total production cost

Variance analysis is employed to determine whether standards were achieved

Efficiency is based on labour & machines working to full capacity

Value is added when an item is produced

They are not normally treated as VC

It is valued at material cost only

It is used to determine why planned product mix was not produced

Efficiency requires schedule adherence & meeting delivery dates

It is added when an item is sold


BOTTLENECK RESOURCES-discussion how to deal with it

Match production resources with demand for them.

This implies there are no constraints in TA. TA is dedicated to identification &

elimination of bottle-neck resources by OT, product specification changes & process improvements to reduce set-up & waiting times.

Where constraint cannot be eliminated & to avoid build-up of WIP, production must be limited to capacity of the bottleneck resource but this capacity must be fully utilised.


BOTTLENECK RESOURCES (cont)

When 1 bottleneck is remove, another one will emerge & the process has to be repeated again

OTHER FACTORS WHICH LIMITTHROUGHPUT1. Existence of an uncompetitive SP.2. Need to deliver on time to particular

customers.3. Lack of product quality & reliability.4. Lack of reliable material supplies.5. Shortage of production resources.


IS TA GOOD OR BAD

TA is too ST as all costs other than direct materials are regarded fixed.

Concentrates on direct material costs & does nothing to control other costs such as OH.

These characteristic make TA a good complement for ABC since ABC focuses on labour & OH.

Throughput maximising could lead to profit-maximising output.

TA helps to direct attention to bottlenecks & focus management on key elements in making profits, inventory reduction & reducing response time to customer demand.


THROUGHPUT ACCOUNTING

Labour

Sales – Direct Material = Throughput Other Production OH

Administration

Selling

Operating Profit

Only material costs are considered variable

Conversion costs are classified as fixed & grouped as total factory costs


PERFORMANCE MEASURES IN TA

Efficiency with which a particular product make use of the bottleneck resource is calculated as

RETURN PER FACTORY HOUR

= Sales – Material Costs__________ Usage (in hrs) of the Bottleneck Resource

TA RATIO is the relationship between RPFH & cost

of each factory hr

TA ratio = RPFH_______ Cost Per Factory Hr

Cost Per Factory Hr = Total FactoryCosts_____ Bottleneck Resource

Available


HOW TO IMPROVE TA RATIO

1. Improve throughput per unit by 2. SP or

material cost per unit.2. Improve throughput return per hr by3. time spent on the bottleneck

resource.4. conversion costs.


LIMITATIONS OF TA RATIO

1. Many organisations cannot produce & market products based on ST profit considerations alone.

2. Need to consider strategic-level issues such as market developments, product developments & stage reached in product life cycle.


REMEMBER TPUT CONCEPTS

IN THE SHORT TERM,MATERIAL…. ALL OTHER COST OF PRODUCTION IS ASSUMED TO BE….. INVENTORY IS BARRIER TO PROFIT

PDT MADE ONLY WHEN THERE IS ORDER PROFITABILITY IS BASED ON HOW FAST CO is

ABLE TO respond to sales (Bottlenecks is constraint to profit)


REMEMBER FORMULA

Throughput per unit= SP-MATERIAL COSTS

Throughput per bottleneck hrSP-MATERIAL per unitBottleneck hr per unit

TPA ratio= Throughput per bottleneck hourConversion cost per bottleneck

hour


Example :THROUGHPUT

Machine time is a bottleneck resource and the maximum capacity is 400 machine hours each week. Operating costs, including direct labour costs, are $5,440 each week. Direct labour costs are $12 per hour, and direct labour workers are paid for a 38-hour week, with no overtime.• Determine the quantities of each product that should be manufactured

and sold each week to maximise profit and calculate the weekly profit.

• Calculate the throughput accounting ratio at this profit-maximising level of output and sales.


Eg 1: Justin Thyme manufactures 4 products, A,B, C and D. Details of sales prices, costs and resource requirements for each of the products are as follows.

Product A Product B Product C Product D

$ $ $ $

Sales price 1.40 0.80 1.20 2.80

Materials cost 0.60 0.30 0.60 1.00

Direct labour cost 0.40 0.20 0.40 1.00

Minutes Minutes Minutes Minutes

Machine time per unit

5 2 3 6

Labour time per unit

2 1 2 5

Units Units Units Units

Weekly sales demand

2,000 2,000 2,500 1,500


Eg 1:WORKINGS FOR SOLUTIONS


$ $ $ $Sales price 1.40 0.80 1.20 2.80

Materials cost 0.60 0.30 0.60 1.00

THROUGHPUT PER UNIT 0.80 0.50 0.60 1.80

bottleneck... Minutes Minutes Minutes Minutes

Machine time per unit 5 2 3 6

THROUGHPUT PER MACHINE MINUTE 0.16 0.25 0.20 0.30 1st


Weekly sales demand 2,000 2,000 2,500 1,500

PRODUCTION in 400x60 =24000 minutes UNITS Throughput per unit Throughput amount$

D 1500*6=9000 1500 1.80 2700

B 2000*2=4000 2000 0.50 1000

C 2500*3= 7500…..20,500 minutes bal= 3500 2500 0.60 1500

A IN 3500minutes can make 3500/5= 700 units 700 0.80 560

5760

Less:fc 5440

Profit 320


Eg 1:WORKINGS FOR SOLUTIONS-Calculate the throughput accounting ratio at this profit-maximising level of output and sales.


$ $ $ $Sales price 1.40 0.80 1.20 2.80

Materials cost 0.60 0.30 0.60 1.00

THROUGHPUT PER UNIT 0.80 0.50 0.60 1.80

bottleneck... Minutes Minutes Minutes Minutes

Machine time per unit 5 2 3 6

THROUGHPUT PER MACHINE MINUTE 0.16 0.25 0.20 0.30 1st


Weekly sales demand 2,000 2,000 2,500 1,500

PRODUCTION in 400x60 =24000 minutes UNITS Throughput per unit Throughput amount$

D 1500*6=9000 1500 1.80 2700

B 2000*2=4000 2000 0.50 1000

C 2500*3= 7500…..20,500 minutes bal= 3500 2500 0.60 1500

A IN 3500minutes can make 3500/5= 700 units 700 0.80 560

5760

Less:fc 5440

Profit 320


THIN CO….

3199.4 2559.52 LAB 548,000 YR1880 HRS PER YEAR 291.49 8.78 1880 HOURS B 800X A600X C504 X3199………4911656.1 -548000

F5 a throughput2015

Economy & Finance

Transcript of F5 a throughput2015