THROUGH PUT ACCOUNTING

QUESTION 1
a) Briefly explain the concept and the theories of throughput put accounting .
b) Explain how through put accounting is impotant in today’s manufacturing
environment.
c) Describe the challenges posed by through put accounting and suggest a possible ways
of resolving the challenge.
d) Explain the term through put accounting ratio TPR
e) Explain the relationship between through put accounting and limiting factors

QUESTION 2
X Limited manufactures a product that requires 1.5 hours of machining. Machine time is a
bottleneck resource, due to the limited number of machines available. There are 10 machines
available, and each machine can be used for up to 40 hours per week. The product is sold for
$85 per unit and the direct material cost per unit is $42.50. Total factory costs are $8,000
each week.
Calculate
(a) the return per factory hour
(b) the TPR.

QUESTION 3
KYC Ltd makes three products Hand Chew (HC), Yogurt Swallow (YS) and Canned Lick
(CL). All three products are sold as a package and so are offered for sale each month in order
to be able to provide a complete market service. The products are fragile and their quality
deteriorates rapidly once they are manufactured. The products are produced on two types of
machine and worked on by a single grade of direct labour. Five direct employees are paid
GH¢8 per hour for a guaranteed minimum of 160 hours each per month. All of the products
are first moulded on machine type 1 and then finished and sealed on machine type 2. The
machine hour requirements for each of the products are as follows:

Product Product Product

HC YS CL
Hours/Unit Hours/Unit Hours/Unit
Machine type 1 1.5 4.5 3
Machine type 2 1 2.5 2

The capacity of the available machines type 1 and 2 are 600 hours and 500
hours per month respectively. Details of the selling prices, unit costs and
monthly demand for the three products are as follows:
 Product Product Product
HC YS CL
GH¢/Unit GH¢/Unit GH¢/Unit
Selling price 91 174 140
+Component cost 22 19 16
Other direct material cost 23 11 14
Direct labour cost at GH¢8 per hour 6 48 36
Overheads 24 62 52
Profit 16 34 22

Maximum monthly demand (units) 120 70 60

Although KYC Ltd uses marginal costing and contribution analysis as the
basis for its decision making activities, profits are reported in the monthly
management accounts using the absorption costing basis. Finished goods
(inventories) are valued in the monthly management accounts at full
absorption cost.

Required:
i) Calculate the machine utilisation rate per month for each machine and
explain which of the machines is the bottleneck/limiting factor.
(4 marks)
ii) ii) Using the current system of marginal costing and contribution
analysis, calculate the profit maximising monthly output of the three
products. (5 marks)
iii) Explain why throughput accounting might provide more relevant
information in KYC’s circumstances.
(4 marks)
iv) Using a throughput approach, calculate the throughput-maximising
monthly output of the three products.
(5 marks)
(Total: 25 marks)
QUESTION 4
Justin Thyme manufactures four products, A, B, C and D. Details of sales prices, costs and
resource requirements for each of the products are as follows.

PRODUCT PRODUCT PRODUCT PRODUCT

A B C D
GHS GHS GHS GHS
Sales price 1.40 0.80 1.20 2.80
Material cost 0.6 0.30 0.60 1.00
Direct labour cost 0.40 0.20 0.40 1.00
minutes Minutes Minutes Minutes
Machine time per unit 5 2 3 6
Labour time per unit 2 1 2 3
Units Units Units Units
Weekly sales demand 2,000 2,000 2,500 1,500
Machine time is a bottleneck resource and the maximum capacity is 400 machine hours each
week. Operating costs, including direct labour costs, are $5,440 each week. Direct labour
costs are $12 per hour, and direct labour workers are paid for a 38-hour week, with no
overtime.

(a) Determine the quantities of each product that should be manufactured and sold each week
to maximise profit and calculate the weekly profit.

(b) Calculate the throughput accounting ratio at this profit-maximising level of output and
sales.

QUESTION 5
After manufacture, each heater has to go through three processes: 'Assembly', 'Quality
Control' and 'Packaging'. The following information is available for the three heaters:

Alpha Beta Gamma

GHS GHS GHS
Sales price per unit 2.00 2.25 1.175
Direct materials cost per unit 0.5 0.81 0.35
Direct labour cost per unit 0.3 0.6 0.5
Machine time per unit: Minutes Minutes Minutes
Assembly (in minutes) 2 3 2.5
Quality Control (in minutes) 3 4 2
Packaging (in minutes) 4 5 3
units units units
Weekly sales demand 1,000 1,500 850

Operating expenses, including labour, are $4,000. The maximum hours available for the
machines are 150 hours (Assembly), 170 hours (Quality Control) and 250 hours (Packaging).

Required
a) How many units of 'Beta' should be produced each week to maximise profit?

In order to be able to meet increased demand, CBF Co bought another assembly machine, so
doubling capacity. The quality control and packaging machines were also modified, so
increasing their capacity by 70% and 40% respectively. The per unit factors of sales price,
material cost and machine time remain unaltered.

The economy thrived and the maximum demand for each product rose to 1,500 Alpha, 2,750
Beta and 900 Gamma. Operating expenses increased by 30% and the packaging machine
became the bottleneck. Weekly profit maximising output has been calculated as 1,500 Alpha,
2,460 Beta and 900 Gamma giving a weekly profit of GHS1852.40
b) What is the throughput accounting ratio at this profit maximising level of output, to two
decimal places?

c) Which of the variable would increase CBF Co's throughput accounting ratio?

QUESTION 6
WR Co manufactures three products, A, B and C. Product details are as follows.

Product A Product B Product C

GHS GHS GHS
Sales price 2.80 1.60 2.40
Materials cost 1.20 0.6 1.20
Direct labour cost 1.00 0.80 0.80
Weekly sales demand 4,000 units 4,000 units 5,000 units
Machine hours per unit 0.5 hours 0.2 hours 0.3 hours

Machine time is a bottleneck resource and maximum capacity is 4,000 machine hours per
week. Operating costs including direct labour costs are $10,880 per week. Direct labour
workers are not paid overtime and work a standard 38-hour week.

Required
Determine the optimum production plan for WR Co and calculate the weekly profit that
would arise from the plan.

QUESTION 7
Solar Systems Co (S Co) makes two types of solar panels at its manufacturing plant: large
panels for commercial customers and small panels for domestic customers. All panels are
produced using the same materials, machinery and a skilled labour force. Production takes
place for five days per week, from 7 am until 8 pm (13 hours), 50 weeks of the year. Each panel
has to be cut, moulded and then assembled using a cutting machine (Machine C), a moulding
machine (Machine M) and an assembly machine (Machine A).

As part of a government scheme to increase renewable energy sources, S Co has guaranteed

not to increase the price of small or large panels for the next three years. It has also agreed to
supply a minimum of 1,000 small panels each year to domestic customers for this three-year
period.
Due to poor productivity levels, late orders and declining profits over recent years, the
finance director has suggested the introduction of throughput accounting within the
organisation, together with a ‘Just in Time’ system of production. Material costs and selling
prices for each type of panel are shown below.
 Large panels Small
panels
$ $
Selling price per unit 12,600 3,800
Material costs per unit 4,300 1,160
Total factory costs, which include the cost of labour and all factory overheads, are $12
million each year at the plant.
Out of the 13 hours available for production each day, workers take a one hour lunch break.
For the remaining 12 hours, Machine C is utilised 85% of the time and Machines M and A
are utilised 90% of the time. The unproductive time arises either as a result of routine
maintenance or because of staff absenteeism, as each machine needs to be manned by skilled
workers in order for the machine to run. The skilled workers are currently only trained to
work on one type of machine each. Maintenance work is carried out by external contractors
who provide a round the clock service (that is, they are available 24 hours a day, seven days a
week), should it be required.
The following information is available for Machine M, which has been identified as the
bottleneck resource:
Large panels Small panels
Hours per unit Hours per unit
Machine M 1·4 0·6
There is currently plenty of spare capacity on Machines C and A. Maximum annual demand
for large panels and small panels is 1,800 units and 1,700 units respectively.

Required:

(a) Calculate the throughput accounting ratio for large panels and for small panels
and explain what they indicate to S Co about production of large and small
panels. (9 marks )

(b) Assume that your calculations in part (a) have shown that large panels have a higher
throughput accounting ratio than small panels.

Required:

Using throughput accounting, prepare calculations to determine the optimum

production mix and maximum profit of S Co for the next year. (5 marks )

(c) Suggest and discuss THREE ways in which S Co could try to increase its
production capacity and hence increase throughput in the next year without
making any additional investment in machinery. (6 marks )

(20 marks )
QUESTION 8
Glam Co is a hairdressing salon which provides both ‘cuts’ and ‘treatments’ to clients. All cuts
and treatments at the salon are carried out by one of the salon’s three senior stylists. The salon
also has two salon assistants and two junior stylists.
Every customer attending the salon is first seen by a salon assistant, who washes their hair;
next, by a senior stylist, who cuts or treats the hair depending on which service the customer
wants; then finally, a junior stylist who dries their hair. The average length of time spent with
each member of staff is as follows:

Cut Treatment
Hours Hours
Assistant 0·1 0·3
Senior stylist 1 1·5
Junior stylist 0·5 0·5
The salon is open for eight hours each day for six days per week. It is only closed for two
weeks each year. Staff salaries are $40,000 each year for senior stylists, $28,000 each year
for junior stylists and $12,000 each year for the assistants. The cost of cleaning products
applied when washing the hair is $0·60 per client. The cost of all additional products applied
during a ‘treatment’ is $7·40 per client. Other salon costs (excluding labour and raw
materials) amount to $106,400 each year.

Glam Co charges $60 for each cut and $110 for each treatment.

The senior stylists’ time has been correctly identified as the bottleneck activity.

Required:

(a) Briefly explain why the senior stylists’ time has been described as the ‘bottleneck
activity’, supporting your answer with calculations. (4 marks )

(b) Calculate the throughput accounting ratio (TPAR) for ‘cuts’ and the TPAR for
‘treatments’ assuming the bottleneck activity is fully utilised. (6 marks )

(10 marks )

QUESTION 9
Wash Co assembles and sells two types of washing machines – the Spin (S) and the Rinse
(R). The company has two divisions: the assembly division, and the retail division.
The company’s policy is to transfer the machines from the assembly division to the retail
division at full cost plus 10 %. This has resulted in internal transfer prices, when S and R are
being transferred to the retail division, of $220·17 and $241·69 respectively. The retail
division currently sells S to the general public for $320 per machine and R for $260 per
machine. Assume it incurs no other costs except for the transfer price.
The retail division’s manager is convinced that, if he could obtain R at a lower cost and
therefore reduce the external selling price from $260 to $230 per unit, he could significantly
increase sales of R, which would be beneficial to both divisions. He has questioned the fact
that the overhead costs are allocated to the products on the basis of labour hours; he thinks it
should be done using machine hours or even activity based costing.
You have obtained the following information for the last month from the assembly division:
Product S Product
R
Production and sales (units) 3,200 5,450
Materials cost $117 $95
Labour cost (at $12 per hour) $6 $9
Machine hours (per unit) 2 1
Total no. of production runs 30 12
Total no. of purchase orders 82 64
Total no. of deliveries to retail division 64 80
Overhead costs: $
Machine set-up costs 306,435
Machine maintenance costs 415,105
Ordering costs 11,680
Delivery costs 144,400
––––––––
Total 877,620
––––––––
Required:

(a) Using traditional absorption costing, calculate new transfer prices for S and R
if machine hours are used as a basis for absorption rather than labour hours.

Note: round all workings to 2 decimal places. (3 marks )

(b) Using activity based costing to allocate the overheads, recalculate the transfer
prices for S and R.

Note: round all workings to 2 decimal places. (8 marks )

(c) (i) Calculate last month’s profit for each division, showing it both for each
product and in total, if activity based costing is used. (3 marks )
(ii) You have calculated the profits that both divisions made last month using
traditional absorption costing and found them to be as follows:
Using labour hours to allocate overhead Product S Product R Total *
$ $ $
Assembly’s division profit 64,064 119,737 183,801
Retail division’s profit 319,456 99,790 419,246
–––––––
–
Using machine hours to allocate 603,047*
overheads
 –––––––
–

Assembly division’s profit 86,720 97,065 183,785

Retail division’s profit 69,760 349,563 419,323
–
–
–
–
–
–
–
–
6
0
3
,
1
0
8
*
–––––––– * Note: small differences arise in figures because of
rounding.

Required:

Given these two sets of figures and your calculations in (c) (i), discuss
whether activity based costing should be implemented. Consider the
decision from the view of each of the divisional managers.
(6 marks )

(20 marks )
 (a) Process Co is becoming increasingly concerned that environmental costs may be
increasing within the company. However, the company has not yet developed a
structured way for accounting for these costs. It has heard of a number of different
management accounting techniques which can be used to account for environmental
costs, including ‘input/output analysis’, ‘flow cost accounting’, ‘environmental
activity-based costing’ and ‘life cycle costing’.

Required:

Briefly describe TWO of these techniques in the context of environmental management

accounting.
(5 marks )

QUESTION 10

1 Beckley Hill (BH) is a private hospital carrying out two types of procedures on patients.
Each type of procedure incurs the following direct costs:

Procedure A B
$ $
Surgical time and materials 1,200 2,640
Anaesthesia time and materials 800 1,620
BH currently calculates the overhead cost per procedure by taking the total overhead
cost and simply dividing it by the number of procedures, then rounding the cost to the
nearest 2 decimal places. Using this method, the total cost is $2 ,475·85 for Procedure
A and $4,735·85 for Procedure B.

Recently, another local hospital has implemented activity-based costing (ABC). This
has led the finance director at BH to consider whether this alternative costing technique
would bring any benefits to BH. He has obtained an analysis of BH’s total overheads
for the last year and some additional data, all of which is shown below:

Cost Cost driver $

Administrative costs Administrative time per procedure 1,870,160
Nursing costs Length of patient stay 6,215,616
Catering costs Number of meals 966,976
General facility costs Length of patient stay 8,553,600
–––––––––
––
Total overhead costs 17,606,352
–––––––––
––
Procedure A B
No. of procedures 14,600 22,400
Administrative time per procedure (hours) 1 1·5
Length of patient stay per procedure (hours) 24 48
Average no. of meals required per patient 1 4
Required:
(a) Calculate the full cost per procedure using activity-based costing. (6 marks )

(b) Making reference to your findings in part (a), advise the finance director as
to whether activity-based costing should be implemented at BH. (4 marks )

(10 marks )

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