ACCA Strategic Professional · Strategic Business Leader · Cost and management accounting
Harlow Foods, a manufacturer with a single bottleneck machine, has been trying to maximise the utilisation of all workers and machines to reduce unit costs. Inventory has built up in front of the bottleneck, delivery times are poor and cash is tied up. The CEO asks the finance team to recommend an approach based on throughput accounting. Which recommendation is most consistent with that approach?
Rank products by throughput per bottleneck hour and have other resources work to the bottleneck's pace, treating labour as largely fixed. Throughput accounting seeks to maximise flow through the constraint, so fully utilising non-bottleneck resources only increases inventory and worsens delivery times.
- APrioritise products by throughput contribution per bottleneck hour and subordinate other activities to the bottleneck's pace, treating labour as a largely fixed costCorrect
- BRank products by contribution per unit of sales and keep all machines fully utilised
- CAllocate overheads using activity drivers and price products at full cost plus a mark-up
- DTreat direct materials and direct labour as variable and maximise output in every department
Explanation
Throughput accounting, based on the Theory of Constraints, defines throughput as sales less totally variable cost (usually materials) and focuses on the binding constraint. Products are ranked by throughput per bottleneck hour, and non-bottleneck resources should not produce beyond what the bottleneck can process. Maximising utilisation everywhere simply builds inventory.
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