ACCA Applied Skills · Performance Management

Throughput accounting: formula sheet

Full chapter guide

Key formulas

Throughput: Throughput = Sales revenue − Totally variable costs (usually direct materials); Per unit, throughput = selling price − material cost per unit. Labour is normally excluded unless the question says it is truly variable, such as piece-rate pay.
Throughput per bottleneck hour: Throughput per bottleneck hour = Throughput per unit ÷ Bottleneck minutes (or hours) per unit; Use this to rank products when one resource is the constraint. Keep the time unit consistent.
Throughput accounting profit: Profit = Throughput − Operating costs; Operating costs means labour and overheads. Treat them as fixed in the short run.
Stock valuation: Closing inventory valued at direct material cost only; No labour or overhead is carried into inventory, so profit cannot be raised by producing for stock.
Return per factory hour: Return per factory hour = (Sales − Material cost) ÷ Time on bottleneck resource; Another name for throughput per bottleneck hour.
Throughput: Throughput = Sales revenue − Totally variable costs (usually direct materials); Labour is treated as a fixed operating cost in throughput accounting unless the question says otherwise.
Throughput per unit of bottleneck resource: Throughput per bottleneck hour = Throughput per unit ÷ Bottleneck hours per unit; Rank products highest to lowest. Produce in this order until demand or capacity runs out.
Identifying the bottleneck: Hours needed for maximum demand ÷ Hours available; The resource with the highest ratio, above 1, is the bottleneck. It has the shortest supply relative to demand.
Factory cost per bottleneck hour: Total factory cost per hour = Total factory costs ÷ Bottleneck hours available; Used in the throughput accounting ratio (TPAR), covered in a related topic.
Five focusing steps: Identify → Exploit → Subordinate → Elevate → Repeat; Learn the order and be able to explain each step in context.
Throughput (return) per unit: Throughput per unit = selling price − direct material cost (and any other totally variable cost); Do not deduct labour or overheads unless the question says they vary with output.
Return per factory hour: Return per factory hour = throughput per unit ÷ hours of bottleneck time per unit; Use the bottleneck time only, not total time through the factory.
Total factory cost: Total factory cost = labour + overheads (all conversion costs, excluding direct materials); Include all operating costs other than materials. Check the question for what to include.
Cost per factory hour: Cost per factory hour = total factory cost ÷ total bottleneck hours available; Same figure for every product, because it depends on the factory, not the product.
Throughput accounting ratio: TPAR = return per factory hour ÷ cost per factory hour; TPAR > 1: product adds to profit. TPAR < 1: product loses money on a throughput basis. TPAR = 1: break-even.
Throughput per unit: Throughput = selling price − totally variable cost (usually direct material); Labour is excluded unless the question says it varies with output.
Throughput per bottleneck hour: Throughput per unit ÷ bottleneck hours per unit; Use this figure to rank products. Highest ranks first.
Total throughput of a plan: Σ (units made × throughput per unit); Use units actually planned, not demand.
Profit: Total throughput − factory costs; Factory costs are all conversion costs, including labour and overheads.
Bottleneck hours used: Σ (units × bottleneck hours per unit) ≤ hours available; Check this constraint before finalising any plan.

Quick revision

Throughput = sales revenue − totally variable costs (usually direct material).
Conversion cost = labour and overheads, treated as fixed in the short run.
Throughput accounting aims to maximise throughput per unit of the bottleneck resource.
A bottleneck is the resource that limits output of the whole system.
Cost per bottleneck hour = total conversion cost ÷ bottleneck hours available.
Throughput per bottleneck hour = product throughput ÷ bottleneck hours per unit.
TPAR = throughput per bottleneck hour ÷ cost per bottleneck hour.
TPAR above 1 means the product earns more throughput than the cost of the bottleneck time it uses; below 1 means it does not cover that cost.
Rank products by throughput per bottleneck hour, not by throughput per unit.
Raising bottleneck capacity or cutting its time per unit raises TPAR.
Non-bottleneck resources should not be run beyond what the bottleneck needs, as extra stock adds no throughput.
Labour is not treated as variable, so throughput accounting can rank products differently from marginal costing.

Common mistakes

Deducting labour when calculating throughput. Fix: Deduct only totally variable costs, usually materials. Treat labour as an operating cost unless the question says it varies directly with output.
Valuing closing inventory at full production cost or at variable cost including labour. Fix: In throughput accounting, inventory is valued at direct material cost only.
Treating the machine with the most total hours as the bottleneck, ignoring availability. Fix: Always compare needed hours with available hours for each resource. The bottleneck is the shortfall.
Deducting labour cost when calculating throughput. Fix: In throughput accounting, labour is normally a fixed cost. Deduct only materials, or whatever the question calls totally variable.
Deducting labour and overheads when calculating throughput. Fix: In throughput accounting, deduct only totally variable costs, normally materials. Labour goes into factory cost.
Using total product time instead of bottleneck time per unit. Fix: Identify the bottleneck first. Use only that resource's hours in the return per factory hour.
Deducting labour when calculating throughput Fix: Deduct only materials and other totally variable costs. Treat labour as a factory cost unless told it varies with output.
Ranking by throughput per unit, not per bottleneck hour Fix: Always divide by the bottleneck time per unit before ranking.

Exam tips

Learn the three definitions word for word in your own words. OT questions often ask which measure a given cost belongs to.
When a cost is not clearly variable, check the wording. 'Totally variable' means materials, or labour only if paid per unit.
In written answers, name the behavioural point: throughput accounting discourages overproduction because stock carries no labour or overhead.
If the scenario mentions a bottleneck, expect the next step to be throughput per bottleneck hour, so show that figure clearly.
Section C discussion marks reward a balanced view. Mention that it is short-term and assumes costs are fixed.
In objective questions, find the bottleneck first. Every later calculation depends on it.
Read how the question defines throughput. Some questions treat only materials as variable. Follow their definition.
In written parts, use the five steps as a framework but anchor each one to the scenario's own resources.