CMA Final · Strategic Cost Management

Throughput Accounting: formula sheet

Full chapter guide

Key formulas

Throughput: Throughput = Sales revenue − Totally variable costs (usually direct materials); Labour is normally excluded from variable cost unless it is truly variable with output.
Throughput per unit of bottleneck: Throughput per bottleneck hour = (Selling price per unit − Direct material per unit) ÷ Bottleneck hours per unit; Use this to rank products when one resource is the constraint.
Net profit: Net profit = Throughput − Operating expenses; Operating expenses are treated as fixed in the short run.
Throughput accounting ratio (TA ratio): TA ratio = Throughput per bottleneck hour ÷ Total operating expense per bottleneck hour; A ratio above 1 means the product earns more than the cost of the bottleneck hour.
Cost per bottleneck hour: Total operating expenses ÷ Total bottleneck hours available; Also called total factory cost per factory hour.
Throughput: Throughput = Sales revenue − Totally variable costs (usually direct material); Labour and overheads are treated as operating expenses unless they are truly variable with output.
Throughput per unit of bottleneck resource: Throughput per bottleneck hour = Throughput per unit ÷ Bottleneck hours per unit; Use this to rank products and allocate scarce bottleneck time.
Bottleneck identification: Load on resource = Units demanded × Hours per unit; Bottleneck = resource where Load > Available capacity by the largest margin (or highest Load ÷ Capacity); Compare load with available hours for each resource at the planned output.
Factory cost per bottleneck hour: Factory cost per hour = Total factory cost ÷ Bottleneck hours available; Total factory cost means labour and overheads (operating expenses) plus other conversion costs, as the question defines.
Throughput accounting ratio (TPAR): TPAR = Throughput per bottleneck hour ÷ Factory cost per bottleneck hour; TPAR above 1 means the product earns more than the cost of the bottleneck hour. Below 1 means it does not cover it.
Five focusing steps: Identify → Exploit → Subordinate → Elevate → Repeat; Write them in this order and add one practical action for each.
Throughput: Throughput = Sales revenue − Totally variable costs (usually direct material); Labour is a fixed operating expense unless the question says it is paid per unit.
Throughput per unit: Throughput per unit = Selling price per unit − Material cost per unit; Use this as the numerator base for return per factory hour.
Return per factory hour: Return per factory hour = Throughput per unit ÷ Bottleneck hours per unit; Also called throughput contribution per bottleneck hour.
Cost per factory hour: Cost per factory hour = Total operating expenses ÷ Total bottleneck hours available; Operating expenses are labour plus other factory costs, excluding material.
Throughput accounting ratio: TA ratio = Return per factory hour ÷ Cost per factory hour; Above 1: product adds to profit. Below 1: it does not cover factory cost. Equal to 1: break-even.
Net profit: Net profit = Throughput − Operating expenses; Useful as a cross-check on any product mix.
Throughput per unit: Throughput per unit = Selling price per unit − Totally variable cost per unit (usually direct material); Labour and overheads are excluded unless the question says labour is truly variable, for example piece-rate pay.
Throughput per bottleneck minute: Throughput per bottleneck minute = Throughput per unit ÷ Bottleneck minutes per unit; Use hours if the capacity is given in hours. Keep the unit the same throughout.
Bottleneck time required: Time required = Units planned × Bottleneck time per unit; Check this against available bottleneck time at each allocation step.
Profit from the mix: Profit = Total throughput − Total operating expenses (factory cost); Operating expenses are the same whichever mix you choose, so ranking depends only on throughput.
Throughput accounting ratio (TA ratio): TA ratio = Throughput per bottleneck minute ÷ Factory cost per bottleneck minute; Factory cost per bottleneck minute = Total operating expenses ÷ Total bottleneck minutes available. A ratio above 1 means the product earns more than the cost of the bottleneck time it uses.
Throughput: Throughput = Sales revenue − Totally variable costs (usually direct materials); Use the cost definition given in the question. If labour is stated as fixed or a time-based cost, exclude it.
Throughput per unit: Throughput per unit = Selling price − Material cost per unit; Compare with marginal costing contribution per unit, which also deducts labour and variable overhead.
Throughput per bottleneck hour: Throughput per bottleneck hour = Throughput per unit ÷ Bottleneck hours per unit; Rank products on this when one resource limits output.
Throughput accounting profit: Profit = Throughput − Operating expenses; Operating expenses include labour, all overheads and other conversion costs.
Factory cost per bottleneck hour: Factory cost per hour = Total operating expenses ÷ Total bottleneck hours available; Used as the denominator in the TPAR.
Throughput accounting ratio (TPAR): TPAR = Throughput per bottleneck hour ÷ Factory cost per bottleneck hour; A value above 1 means the product earns more than the cost of the hour it uses. Below 1 means it does not cover that cost.
Stock value by method: Absorption: materials + labour + variable OH + fixed production OH. Marginal: materials + labour + variable OH. Throughput: materials only; Throughput accounting gives the lowest stock value.
Profit difference when stock rises: Absorption profit − Throughput profit = Change in stock units × (conversion cost per unit included in absorption cost); This holds when opening stock is nil and the cost per unit stays the same. It is a quick check on your workings.

Quick revision

Throughput = sales revenue − totally variable costs, usually direct material.
Operating expense = all costs other than totally variable costs, such as labour and overheads, treated as fixed in the short run.
Investment in TOC covers inventory, equipment and other assets tied up in the system.
The bottleneck is the resource that limits system output; time lost there is lost for the whole system.
Five focusing steps: identify, exploit, subordinate, elevate, repeat.
Rank products by throughput per bottleneck hour, not by throughput per unit or contribution per unit.
Cost per bottleneck hour = total factory cost ÷ available bottleneck hours.
TA ratio = throughput per bottleneck hour ÷ cost per bottleneck hour; above 1 means the product covers its cost.
Profit = total throughput − operating expense.
Under TA, inventory is valued at material cost only, so there is no incentive to overproduce.
Improving a non-bottleneck adds no throughput; extra capacity at the bottleneck does.
After you elevate a constraint, check where the bottleneck moves.

Common mistakes

Deducting direct labour while calculating throughput. Fix: Subtract only totally variable costs, usually materials. Treat labour as an operating expense unless the question says it varies with output.
Ranking products by throughput per unit instead of per bottleneck hour. Fix: Always divide by the time used on the constraint before ranking.
Ranking products by contribution per unit or by selling price instead of throughput per bottleneck hour. Fix: Once a bottleneck exists, always divide by the bottleneck hours per unit before ranking.
Deducting direct labour and variable overhead when calculating throughput. Fix: Deduct only totally variable costs, usually direct material, unless the question says other costs vary fully with output. Treat labour and overheads as operating expenses.
Deducting labour when computing throughput Fix: In throughput accounting only totally variable cost, usually material, is deducted. Put labour in operating expenses unless told it varies per unit.
Using total hours of all machines for cost per factory hour Fix: Use only the bottleneck hours available. Identify the bottleneck first, then divide operating expenses by those hours.
Ranking products by throughput per unit instead of per bottleneck minute. Fix: Always divide by bottleneck time. A product with lower throughput per unit may use much less bottleneck time and rank higher.
Deducting direct labour when calculating throughput. Fix: Deduct only totally variable costs, usually material. Treat labour as an operating expense unless the question states it varies with output.
Treating direct labour as a variable cost in throughput accounting. Fix: In throughput accounting, labour is normally an operating expense unless the question says it is totally variable. Deduct only materials to get throughput.
Including fixed overhead or labour in throughput accounting stock value. Fix: Value stock at material cost only. This gives the lowest stock value of the three methods.

Exam tips

Use the exact terms throughput, investment and operating expenses in theory answers. Examiners look for them.
For comparison questions, write a point-by-point answer on focus, cost treatment, stock valuation and performance measure.
In numericals, show the bottleneck identification step. It earns marks even if later arithmetic slips.
Always end decision questions with a clear recommendation, and mention one limitation for balance.
For MCQs, remember that throughput normally excludes labour and that stock is valued at material cost only.
For theory questions, write the five steps in order and give one practical action under each. This scores more than definitions alone.
In numerical questions, state the bottleneck explicitly in one line with the load and capacity figures. Examiners look for this.
Write the formula for throughput, then show each product's throughput per bottleneck hour in a small working table so partial marks are safe.