Throughput Accounting

Question 1

What is Throughput Accounting?

Answer 1

Throughput Accounting is a management accounting technique that focuses on maximizing the rate at which a business generates money through sales. Example: A factory tracks how quickly it turns materials into cash via product sales.

Question 2

What is the main goal of Throughput Accounting?

Answer 2

To maximize throughput while minimizing operating expenses and inventory. Example: A manufacturer aims to increase the number of finished goods sold without holding too much stock.

Question 3

Define Throughput in Throughput Accounting.

Answer 3

Throughput = Sales Revenue - Direct Material Cost. Example: A toy sold for $10 with $3 material cost gives $7 throughput.

Question 4

What are Operating Expenses in TA?

Answer 4

All costs other than direct materials, including labor and overheads. Example: Wages, rent, electricity, etc.

Question 5

What is Inventory in TA?

Answer 5

All money invested in things intended to be sold. Example: Raw materials, work-in-progress, and finished goods.

Question 6

List the three key performance measures in TA.

Answer 6

1. Throughput, 2. Operating Expenses, 3. Investment (Inventory). Example: Used to assess system-wide profitability.

Question 7

What is the formula for Throughput per unit?

Answer 7

Throughput per unit = Selling Price - Direct Material Cost. Example: $100 sale - $30 material = $70 throughput.

Question 8

What is Return per Factory Hour?

Answer 8

Return per Factory Hour = Throughput per unit / Time on bottleneck resource. Example: $70 / 0.5 hours = $140/hour.

Question 9

What is Cost per Factory Hour?

Answer 9

Cost per Factory Hour = Total Factory Costs / Total Time on Bottleneck Resource. Example: $14,000 / 1,000 hours = $14/hour.

Question 10

What is Throughput Accounting Ratio (TAR)?

Answer 10

TAR = Return per Factory Hour / Cost per Factory Hour. Example: $140 / $14 = 10. TAR > 1 means profitable.

Question 11

What does a TAR < 1 mean?

Answer 11

The product or decision is not covering its cost per factory hour — it’s unprofitable. Example: A TAR of 0.8 shows inefficiency.

Question 12

What is a bottleneck in TA?

Answer 12

A bottleneck is the process step that limits the overall throughput. Example: A single packaging machine slowing down entire production.

Question 13

How can a business improve throughput?

Answer 13

By increasing sales of high-throughput products or reducing time spent on bottlenecks. Example: Assigning more labor to speed up slow stations.

Question 14

Why is labor not treated as a variable cost in TA?

Answer 14

Labor is usually fixed in the short term, so TA treats it as part of operating expenses. Example: Salaried workers get paid regardless of output.

Question 15

Contrast Throughput Accounting with Traditional Costing.

Answer 15

Traditional costing focuses on cost control; TA focuses on profit maximization by managing bottlenecks. Example: TA ignores labor cost per unit.

Question 16

What principle is TA based on?

Answer 16

The Theory of Constraints — improving the weakest part of the process to boost the whole system. Example: Fixing the slowest machine improves total output.

Question 17

Why is TA useful for short-term decision making?

Answer 17

It highlights product profitability and resource constraints clearly. Example: Choosing between two products with different material and time needs.

Question 18

How does TA treat fixed costs?

Answer 18

All fixed costs are grouped under operating expenses. Example: Factory rent and salaries are not assigned per product.

Question 19

What is the focus of product ranking in TA?

Answer 19

Ranking is based on return per factory hour, prioritizing bottleneck resource usage. Example: Making high-margin, low-time products first.

Question 20

How do you improve TAR?

Answer 20

Increase return/hour or reduce cost/hour. Example: Streamlining production steps or increasing output speed.

Question 21

What kind of products should be prioritized using TA?

Answer 21

Those with the highest throughput per hour of bottleneck resource. Example: Product A gives $100/hour vs. B gives $60/hour.

Question 22

Is depreciation included in TA?

Answer 22

Yes, under operating expenses. Example: Machinery depreciation is not treated as a product cost.

Question 23

Why is material cost key in TA?

Answer 23

Only direct material cost is deducted from revenue to calculate throughput. Example: Labor and overheads are ignored in the formula.

Question 24

Can TA be used in service businesses?

Answer 24

Yes, by identifying bottlenecks like staff availability. Example: A salon uses TA to manage appointment slots efficiently.

Question 25

Give an example of applying TA in retail.

Answer 25

A store ranks products by profit per display space hour to decide shelf layout.

Question 26

Give a scenario of product choice using TA.

Answer 26

Choose Product A: $10 throughput, 0.2 hours → $50/hr vs. Product B: $20 throughput, 0.8 hours → $25/hr.

Question 27

How does TA support continuous improvement?

Answer 27

By identifying and eliminating bottlenecks. Example: Replacing outdated machinery that slows production.

Question 28

What’s a limitation of Throughput Accounting?

Answer 28

It ignores non-material variable costs like commissions. Example: Can understate total cost.

Question 29

Why is factory hour the key constraint in TA?

Answer 29

Because it's often the limiting resource. Example: Machines only run a fixed number of hours per week.

Question 30

What is the break-even concept in TA?

Answer 30

When throughput equals operating expenses. Example: Business covers all fixed costs from sales.

Question 31

How is profitability assessed in TA?

Answer 31

By checking if TAR > 1. Example: A TAR of 1.5 indicates good use of bottleneck time.

Question 32

What happens if bottleneck hours are miscalculated?

Answer 32

Profitability and product decisions may be flawed. Example: Overestimating time can lead to poor prioritization.

Question 33

Why does TA discourage overproduction?

Answer 33

Extra inventory ties up capital and doesn’t add throughput. Example: Making goods without demand increases storage costs.

Question 34

How can automation affect TA?

Answer 34

May shift bottleneck to another process and increase fixed costs. Example: Faster packing may now wait on slower labeling.

Question 35

What is meant by ‘Throughput Maximization’?

Answer 35

Making best use of bottleneck to earn the most money. Example: Run most profitable product continuously.

Question 36

How can TA be used to justify capital investment?

Answer 36

By showing improved TAR after removing bottlenecks. Example: New machine improves return/hour.

Question 37

What’s the role of non-bottleneck resources?

Answer 37

Support throughput but should not be overloaded. Example: Don't increase raw material stock beyond bottleneck capacity.

Question 38

How is customer demand linked to TA?

Answer 38

Production should align with demand to avoid waste. Example: No need to maximize throughput for unsellable goods.

Question 39

What is idle time in bottleneck resource?

Answer 39

Time when the constraint is not used — wasted opportunity. Example: A key machine waiting for inputs lowers throughput.

Question 40

How does TA align with lean production?

Answer 40

Both aim to eliminate waste and maximize value. Example: Focused flow reduces excess inventory.