Chapter 5 Limiting Factors and Throughput Accounting
1. Objectives
1.1 Identify limiting factors in a scarce resource situation and lect an appropriate technique.
1.2 Determine the optimal production plan where an organization is restricted by a single limiting factor.
1.3 Explain the concept of optimized production technology.
1.4 Explain the theory of constraints.
1.5 Explain the concept of throughput accounting.
1.6 Calculate and interpret a throughput accounting ratio (TPAR).
1.7 Compare the techniques of limiting factors and throughput accounting in the determination of optimal production.
2. Limiting Factors
2.1 | Limiting Factors |
| A limiting factor is any factor that is in scarce supply and that stops the organisation from expanding its activities further, that is, it limits the organisations activities. |
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2.2 An organisation might be faced with just one limiting factor (other than maximum sales demand) but there might also be veral scarce resources, with two or more of them putting an effective limit on the level of activity that can be achieved.
2.3 Examples of limiting factors include sales demand and production constraints.
(a) Labour. The limit may be either in terms of total quantity or of particular skills.
(b) Materials. There may be insufficient available materials to produce enough units to satisfy sales demand.
(c) Manufacturing capacity. There may not be sufficient machine capacity for the production required to meet sales demand.
2.4 It is assumed in limiting factor analysis that management would make a product mix decision or rvice mix decision bad on the option that would maximi profit and that profit is maximized when contribution is maximid (given no change in fixed cost expenditure incurred). In other words, marginal costing ideas are applied.
(a) Contribution will be maximid by earning the biggest possible contribution per unit of limiting factor. For example if grade A labour is the limiting factor, contribution will be maximid by earning the biggest contribution per hour of grade A labour worked.
(b) The limiting factor decision therefore involves the determination of the contribution earned per unit of limiting factor by each different product.
(c) If the sales demand is limited, the profit-maximising decision will be to produce the topranked product(s) up to the sales demand limit.
植树日2.5 In limiting factor decisions, we generally assume that fixed costs are the same whatever product or rvice mix is lected, so that the only relevant costs are variable costs.
食品安全案例2.6 When there is just one limiting factor, the technique for establishing the contribution-maximising product mix or rvice mix is to rank the products or rvices in order of contribution-earning ability per unit of limiting factor.
闺蜜男2.7花将军 | Example 1 |
| Sausage makes two products, the Mash and the Sauce. Unit variable costs are as follows. | Mash鸿门宴教案 | Sauce | | $ | $ | Direct materials | 1 | 3 | Direct labour ($3 per hour) | 6 | 3 | Variable overhead | 1 | 1 | | 8 | 7 | | | |
The sales price per unit is $14 per Mash and $11 per Sauce. During July the available direct labour is limited to 8,000 hours. Sales demand in July is expected to be as follows. Mash | 3,000 units | Sauce | 5,000 units | | |
Required: Determine the production budget that will maximize profit, assuming that fixed costs per month are $20,000 and that there is no opening inventory of finished goods or work in progress. Solution: 1. Determine the limiting factor | Mash | Sauces | Total | Labour hours per unit | 2 hrs | 1 hr | | Sales demand | 3,000 units | 5,000 units | | Labour hours needed | 6,000 hrs | 5,000 hrs | 11,000 hrs | Labour hours available | | | 8,000 hrs | Shortfall | | | 3,000 hrs | | | | |
Labour is the limiting factor on production. 2. Identify the contribution earned by each product per unit of scarce resource, that is, per labour hour worked. | Mash | Sauce | 数学所有公式 | $ | $ | Sales price | 14 | 11 | Variable cost | 8 | 7 | 金山禅寺Unit contribution | 6 | 4 | Labour hour per unit | 2 hrs | 1 hr | Contribution per labour hour (= per unit of limiting factor) | $3 | $4 | Ranking | 2 | 1 | | | |
3. Determine the budgeted production and sales. Product | Units | Hours needed | Contribution per unit | Total | | | | $ | $ | Sauces | 5,000 | 5,000 | 4 | 20,000 | Mashes (Bal.) | 1,500 | 3,000 | 6 | 9,000 | | | 8,000 | | 29,000 | Less: fixed costs | | | | 20,000 | Profit | | | | 9,000 | | | | 怎么嫩肤 | |
Conclusion: (1) Unit contribution is not the correct way to decide priorities. (2) Labour hours are the scarce resource, therefore contribution per labour hour is the correct way to decide priorities. (3) The Sauce earns $4 contribution per labour hour, and the Mash earns $3 contribution per labour hour. Sauces therefore make more profitable u of the scarce resource, and should be manufactured first. |
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Question 1 Triproduct Limited makes and lls three types of electronic curity systems for which the following information is available. Standard cost and lling prices per unit Product | Day scan | Night scan | Omni scan | | $ | $ | $ | Materials | 70 | 110 | 155 | Manufacturing labour | 40 | 55 | 70 | Installation labour | 24 | 32 | 44 | Variable overheads | 16 | 20 | 28 | Selling price | 250 | 320 | 460 | | | | |
Fixed costs for the period are $450 000 and the installation labour, which is highly skilled, is available for 25 000 hours only in a period and is paid £8 per hour. Both manufacturing and installation labour are variable costs. The maximum demand for the product is: Day scan | Night scan | Omni scan | 2,000 units | 3,000 units | 1,800 units | | | |
Required: (a) Calculate the shortfall (if any) in hours of installation labour. (2 marks) (b) Determine the best production plan, assuming that Triproduct Limited wishes to maximi profit. (5 marks) (c) Calculate the maximum profit that could be achieved from the plan in part (b) above. (3 marks) (d) Having carried out an investigation of the availability of installation labour, the firm thinks that by offering $12 per hour, additional labour would become available and thus overcome the labour shortage. Required: Bad on the results obtained above, advi the firm whether or not to implement the proposal. (5 marks) (Total 15 marks) |
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