In: Accounting
Q2
The following data refers to a soft drinks manufacturing company that passes its products through five processes and is currently operating at optimal capacity.
Process Time per unit (minutes) Machine hours available
Washing 6 1200
Filling 3 700
Capping 1.5 250
Labelling 2 450
Packing 6 1300
Product data GHS/unit
Selling price 0.6
Direct material 0.18
Direct labour 0.02
Factory fixed costs GHS4, 120
Required
a. Since the product has to go through five processes to be manufactured, we need to find out the maximum possible production under each process. The least amongst these would be the maximum output possible in the available time.
Calculation of maximum production possible under each process:
Process available | Machine hours available | Time per unit (minutes) | Maximum production (units) |
---|---|---|---|
Washing | 1200 | 6 | 12,000 units {(1200*60)/6} |
Filling | 700 | 3 | 14,000 units {(700*60)/3} |
Capping | 250 | 1.5 | 10,000 units {(250*60)/1.5} |
Labelling | 450 | 2 | 13,500 {(450*60)/2} |
Packing | 1300 | 6 | 13,000 {(1300*60)/6} |
As can be seen from the above, in the given available time the maximum production possible to pass through all the processes is 10,000 units since Cappping has the lowest capacity amongst rest of the processess and it cannot process any further number of units than this.
b. Throughput accounting concept is similar to key factor concept of marginal costing. In this all costs other than material cost is treated as fixed cost. Thus Throughput Contribution is calculated by the difference between Sales and Material cost alone. No other costs are considered.
Throughput accounting Ratio is calculated by dividing return per factory hours by cost per factory hours. The hours can be replaced with minutes.
Return per factory hours is calculated by finding the throughput contribution per unit and then diving it by available time on bottleneck resource. As mentioned above, Throughput contribution is calculated by difference between Selling Price and material cost. Bottleneck resource is the key factor that is something which internal to the organistation and is available in short supply. In the given question bottleneck resource is the Capping process.
Statement showing throughput accounting ratio:
Particulars | Amount/Minutes |
---|---|
Selling price per unit | 0.6 |
Direct Material | 0.18 |
Throughput Contribution per unit | 0.42 (0.60-0.18) |
Production time on bottleneck resource per unit | 1.5 minute per unit |
Throughput Contribution per unit per limiting factor | 0.28 (0.42/1.5) |
Total Factory fixed cost | 4,120 |
Total time available on bottleneck resource | 15,000minutes (250hrs*60minutes) |
Factory cost per limiting factor | 0.28 (4,120/15,000) |
Throughput accounting ratio (Contr. per minute/Cost per minute) | 1 (0.28/0.28) |
c. Advantages:
- Throughput accounting is a costing technique which emphasises on capacity utilisation. It assumes that there will always be a bottleneck in the production process which is true in the practical scenario. Thus it focuses on maximising the contribution within these limiting factors.
- It helps identify which is the bottleneck resource and improvement & management of the same can significantly increase the contribution of the company.
Disadvantages:
- This whole concept is revolving around the bottleneck resource. Some production processes are so complex that it might be difficult to arrive at a particular resource which could be the bottleneck. In such scenarios, throughput accounting wouldn't be a beneficial tool.
- It is a tool which helps in improving short term results. Thus in the long run it may not prove to be useful.