Throughput Accounting (1)

Question 1

What is theory of constraints?

Answer 1

A production system where key financial concept is maximisation of throughput while keeping conversion and investment costs to a minimum

Question 2

What is throughput contribution?

Answer 2

Sales revenue - direct material cost

Question 3

What is throughput contribution per unit?

Answer 3

Sales price per unit - direct material cost per unit

Question 4

Key financial concept of theory of constraints?

Answer 4

Turn materials into sales as quickly as possible, thereby maximising net cash generated from sales

Question 5

What happens in throughput accounting?

Answer 5

All operational expenses except materials are assumed to be fixed costs

Question 6

What is a bottle neck resource?

Answer 6

A process which has a lower capacity than preceding or subsequent activities, thereby limiting throughput

Question 7

What is a binding constraint?

Answer 7

When one process will inevitably act as a bottleneck

Question 8

What is bottleneck resource also known as?

Answer 8

A binding constraint

Question 9

What is the only way to increase throughput?

Answer 9

Increase the capacity of the bottleneck constraint. “Elavating the bottleneck?

Question 10

1st step in Goldratt?

Answer 10

Identify the binding constraint/bottleneck

Question 11

2nd step in Goldratt?

Answer 11

Exploit. The highest possible output must be achieved from the binding constraint

Question 12

3rd step in Goldratt?

Answer 12

Subordinate. Operations prior to the binding constraint should operate at the same speed as it so that WIP does not build up

Question 13

4th step in Goldratt?

Answer 13

Elevate the system’s bottleneck. Steps should be taken to increase resources or improve its efficiency

Question 14

5th step in Goldratt?

Answer 14

Return to Step 1. The removal of one bottleneck will create another elsewhere in the system

Question 15

Goldratt theory and one bottleneck resource?

Answer 15

As there is one bottleneck resource, all other resources in production aren’t bottlenecks and they will all have idle capacity

Question 16

Why should idle time should be accepted?

Answer 16

Since all operational costs are fixed, idle time is not costing any money

Question 17

What should be done with resources that aren’t bottlenecks?

Answer 17

Should not be used beyond the amount required for maximum achievable throughput, given the bottleneck resource

Question 18

What happens when using non-binding constraints beyond the amount required for maximum achievable throughput?

Answer 18

Leads to a build up of inventories

Question 19

Inventories in traditional cost accounting?

Answer 19

Improving efficiency and creating more inventory will increase profits. Higher inventories reduce cost of sales and increase reported profits

Question 20

Inventory levels in theory of constraints?

Answer 20

Using non-bottleneck resources above the amount required for maximum throughput is wasteful. It doesn’t increase throughput, only increases unused inventory levels