= (Sales price – Material Cost) / Time spent
at bottleneck per product
= Total
factory cost / Total time available at bottleneck
= Return
per factory hour / cost per factory hour
|
|
Product X |
Product Y |
|
Selling price |
200 |
200 |
|
Direct material |
50 |
50 |
|
Direct Labour* |
100 |
105 |
|
Direct cost |
150 |
155 |
|
Contribution |
50 |
45 |
Total
factory cost: $8000
·
The calculation for direct labour is based on a
detailed timing in each of four operational processes:
|
|
Cutting |
Stamping |
Machining |
Assembly |
Total Hours |
|
|
Available hours |
|
|
|
|
|
|
Per week |
400 |
500 |
200 |
400 |
|
|
Product X per week |
2 |
3 |
4 |
1 |
10 |
|
Product Y per week |
2.5 |
4.5 |
2 |
1.5 |
10.5 |
·
Labour Rate of $10 per hour Product X costs $100 and
Product Y costs $105
Bottlenecks
/ limiting factors must be taken into consideration in determining relative
product profitability.
In this
example machining operation with only 200 hours available is the major
bottleneck
Product X
at the bottle neck = 200/ 4 = 50 units
Product Y
at the bottle neck = 200/2 = 100 units
By
concentrating production and sales on n Product Y the business would earn money more quickly. Product profitability, therefore, is the
rate at which precuts earn money, not the method whereby they share costs.
Examining
contribution as a measure of profitability.
Throughput accounting stresses the products do not earn profit,
businesses earn profit by selling products.
|
|
Product
X |
Product
Y |
|
Return per factory hour |
(200 –
50) / 4hours |
(200 –
50 ) / 2 hours |
|
|
$37.50
per hour |
$75 per
hour |
Return per factory hour is the amount of money earned through sales of a specific product per hour of limiting factor (bottleneck) because machining is the limiting factor the hours each product spends in machining is the denominator of the fraction.
|
|
Product
X |
Product
Y |
|
Cost per factory hour |
8000/200 |
8000/200 |
|
|
$40 per
hour |
$40 per
hour |
Cost per factory hour is the total
cost of running the productivity capacity (all costs except material costs)
divided by the number of hours available at the limiting factor (bottleneck).
|
|
Product
X |
Product
Y |
|
Throughput accounting ratio |
37.50 /
40.00 |
75.00 /
40.00 |
|
|
$.9375 |
$1.8750 |
Throughput Ratio A business can only earn profits if the rate
at which it earns money from sale sis greater than the rate at which it spends
money on production. Product Y
demonstrates this ability; product X does not. The throughput ratio allows management
to direct its business by helping mangers to concentrate on current production
constraints.