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Strategic Cost Management · Throughput Accounting

Product Mix Decisions Under Constraints Using Throughput Accounting

Updated 11 October 2026 · Fact-checked

Under throughput accounting, you rank products by throughput per bottleneck minute, where throughput = selling price − totally variable cost (usually direct material). Make the highest-ranked product first up to its demand limit, then the next, until bottleneck hours run out. Operating expenses are treated as fixed and do not affect the ranking.

Understand Product Mix Decisions Under Constraints

Every factory has one resource that limits output. It may be a machine, a skilled team or a testing line. This is the bottleneck (constraint). A rupee of profit is earned only when the bottleneck is used well. Time lost at the bottleneck is lost for the whole plant.

Throughput accounting measures a product by throughput: sales revenue minus totally variable costs. In most questions the only totally variable cost is direct material (and sometimes bought-in components or sales commission). Direct labour and overheads are treated as operating expenses, which stay fixed in the short run.

To choose between products, you cannot compare throughput per unit alone. A product with high throughput per unit may use a lot of bottleneck time. So you compute throughput per bottleneck minute (or hour) = throughput per unit ÷ bottleneck time per unit. The product with the highest figure gets priority.

Then you allocate the limited bottleneck hours in rank order, subject to maximum demand for each product. Total throughput of the mix minus total operating expenses gives profit. If demand is not limiting, the top-ranked product takes all the bottleneck time.

This looks like the marginal costing limiting factor method. The difference is in the cost treatment. Marginal costing deducts variable labour and variable overheads, so contribution per limiting factor can differ. Throughput accounting deducts only material, so the ranking can change. In the exam, follow the method the question names.

Key rules to remember

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.

How to solve Product Mix Decisions Under Constraints questions

Use this sequence for any product mix question that mentions throughput accounting, a bottleneck or a constraint.

  1. 1Identify the bottleneck. Compute total time needed at each resource for the maximum demand and compare with the capacity. The resource with the largest shortfall is the bottleneck.
  2. 2Compute throughput per unit for each product: selling price minus direct material (and other totally variable costs).
  3. 3Compute bottleneck minutes per unit for each product from the data given.
  4. 4Divide to get throughput per bottleneck minute and rank products from highest to lowest.
  5. 5Allocate bottleneck time in rank order. Give each product its full demand, or what is left of the time, whichever is lower.
  6. 6Compute total throughput of the planned mix and subtract operating expenses to get profit.
  7. 7If asked, compute TA ratios, compare with marginal costing, or recommend. State the plan and the reason in one or two lines.

Quickest way: Rank, fill, subtract

When to use it: Use when the question gives one clear bottleneck and a demand limit per product, and asks for the best mix or profit.

  1. Write a small table with columns: price, material, throughput, bottleneck minutes, throughput per minute, rank.
  2. Fill the bottleneck hours from rank 1 downward. Write cumulative minutes used after each product so you see exactly where time ends.
  3. Throughput of the last product is partial. Make units = remaining minutes ÷ minutes per unit.
  4. Add the throughputs, subtract the fixed operating expenses, and write the answer with a short recommendation.

Common mistakes in Product Mix Decisions Under Constraints

  • Ranking products by throughput per unit instead of per bottleneck minute.

    Per-unit throughput is easier to see and looks like the answer.

    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.

    Students carry over the contribution habit from marginal costing.

    Fix: Deduct only totally variable costs, usually material. Treat labour as an operating expense unless the question states it varies with output.

  • Choosing the bottleneck without checking all resources.

    The question names a machine, and students assume it is the constraint.

    Fix: Compute required hours against available hours for every resource at full demand. The most overloaded resource is the bottleneck.

  • Ignoring demand limits when allocating time.

    Students give all time to rank 1 product.

    Fix: Cap each product at its maximum demand. Pass leftover time to the next rank.

  • Forgetting to subtract operating expenses to reach profit.

    The ranking work feels like the end of the question.

    Fix: Read the last line of the question. If it asks for profit, subtract total operating expenses from total throughput.

Worked examples

Example 1

Anand Engineering makes products P, Q and R. Machine hours at the bottleneck are limited to 2,400 hours a month. Data per unit: P: price ₹900, material ₹300, bottleneck time 2 hours, maximum demand 500 units. Q: price ₹700, material ₹250, time 1.5 hours, demand 600 units. R: price ₹600, material ₹200, time 1 hour, demand 700 units. Operating expenses are ₹4,00,000 a month. Find the optimal mix and profit under throughput accounting.

Show the solution
  1. Throughput per unit: P = 900 − 300 = ₹600. Q = 700 − 250 = ₹450. R = 600 − 200 = ₹400.
  2. Throughput per bottleneck hour: P = 600 ÷ 2 = ₹300. Q = 450 ÷ 1.5 = ₹300. R = 400 ÷ 1 = ₹400.
  3. Ranking: R first (₹400), then P and Q tie at ₹300.
  4. Allocate: R takes 700 × 1 = 700 hours. Remaining = 2,400 − 700 = 1,700 hours.
  5. P and Q tie, so any split of the remaining time gives the same throughput. Demand for P needs 500 × 2 = 1,000 hours. Make P 500 units, using 1,000 hours. Remaining = 700 hours.
  6. Q: 700 ÷ 1.5 = 466.67 units. Take 466 units whole, using 699 hours, if only whole units are allowed. Throughput of Q = 466 × 450 = ₹2,09,700. (With fractional units it is 700 × 300 = ₹2,10,000.)
  7. Throughput: R = 700 × 400 = ₹2,80,000. P = 500 × 600 = ₹3,00,000. Q = ₹2,09,700. Total = ₹7,89,700.
  8. Profit = 7,89,700 − 4,00,000 = ₹3,89,700.

Answer: Make 700 units of R, 500 units of P and about 466 units of Q. Throughput is ₹7,89,700 and profit is ₹3,89,700 (₹3,90,000 if fractional units of Q are allowed). P and Q earn the same per bottleneck hour, so the split between them does not change throughput.

Example 2

Kaveri Components makes two products, X and Y. Available time on the bottleneck (the assembly cell) is 1,800 minutes a week. X: price ₹500, material ₹200, assembly 6 minutes per unit, demand 200 units. Y: price ₹420, material ₹120, assembly 5 minutes per unit, demand 250 units. Total weekly operating expenses are ₹54,000. (a) Find the best mix and profit. (b) Compute the TA ratio of each product.

Show the solution
  1. Throughput: X = 500 − 200 = ₹300. Y = 420 − 120 = ₹300.
  2. Per assembly minute: X = 300 ÷ 6 = ₹50. Y = 300 ÷ 5 = ₹60. Y ranks first.
  3. Y demand needs 250 × 5 = 1,250 minutes. Remaining = 1,800 − 1,250 = 550 minutes.
  4. X: 550 ÷ 6 = 91.67 units. Make 91 whole units, using 546 minutes.
  5. Throughput: Y = 250 × 300 = ₹75,000. X = 91 × 300 = ₹27,300. Total = ₹1,02,300.
  6. Profit = 1,02,300 − 54,000 = ₹48,300.
  7. Factory cost per minute = 54,000 ÷ 1,800 = ₹30.
  8. TA ratio: X = 50 ÷ 30 = 1.67. Y = 60 ÷ 30 = 2.00.

Answer: Make 250 units of Y and 91 units of X. Profit is ₹48,300. TA ratios are 1.67 for X and 2.00 for Y. Both exceed 1, so each product earns more than the cost of the assembly time it uses, and Y has priority.

Exam tips

  • Write the bottleneck test first when the question does not name it. One line of hours required versus available earns method marks.
  • Show the ranking table clearly. Even if the final arithmetic slips, examiners give marks for correct throughput and per-minute figures.
  • When the question compares with marginal costing, compute contribution per limiting factor separately and state why rankings differ: labour and variable overheads are deducted in one method and not the other.
  • End with a recommendation in plain words, such as which product to prioritise and whether a TA ratio below 1 means the product should be reviewed.
  • In MCQs, check whether labour is stated to be variable, and read whether the answer asks for throughput or profit.

Practice questions from Throughput Accounting

Product Mix Decisions Under Constraints in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Product Mix Decisions Under Constraints: frequently asked questions

How do you rank products under throughput accounting?

Calculate throughput per unit (price minus direct material), then divide by the bottleneck time per unit. Rank from highest to lowest throughput per bottleneck minute. Allocate time in that order, respecting demand limits.

What is the difference between throughput accounting and marginal costing for a limiting factor?

Marginal costing ranks by contribution per limiting factor unit, after deducting all variable costs including labour and variable overheads. Throughput accounting deducts only totally variable costs, usually material, and treats the rest as fixed operating expenses. The rankings can therefore differ.

What does a TA ratio below 1 mean?

It means the product earns less throughput per bottleneck minute than the factory cost per bottleneck minute. At the current resource use it does not cover its share of operating expenses. Consider raising price, cutting material cost, reducing bottleneck time or dropping the product.

Is direct labour ever treated as a variable cost in throughput accounting?

Usually not, because labour is paid regardless of output in the short run. If the question states that labour is paid per unit and varies fully with output, treat it as a totally variable cost and deduct it.