ADVANCED MANAGEMENT ACCOUNTING

ACC60804
TUTORIAL 5 (SOLUTIONS)

Question 1
Product PEC-1 PEC-2
Selling price $200 $250
Demand 40 units 15 units
Material A $30 -
Material B $80 $80
Material C - $57.50

Process 1: Receiving 35 min 25 min

Process 2: Machining 80 min -
Process 3: Assembly 45 min 75 min
Process 4: Finishing 60 min 40 min

Step 1: Identify the bottleneck:

The bottleneck is identified by comparing the total available time and total required time at each process
with a given demand.

(a) (b) Total Slack

PEC-1 PEC-2 (a) X 40 (b) X 15 Total minutes
40 15 minutes available
units units PEC-1 PEC-2 Required
Process 1: Receiving 35 25 1,400 375 1,775 2000 225
Process 2: Machining 80 0 3200 0 3200 3500 300
Process 3: Assembly 45 75 1800 1125 2925 2000 (925)
Process 4: Finishing 60 40 2400 600 3000 3500 500

Constraint occurs in Process 3 – Assembly. It is because Process 3 – Assembly does not have
sufficient labour hours (2000 – 2925 = -925) to produce all 40 units of PEC1 and 15 units of
PEC2.

Thus, Process 3 – Assembly is the only process that does not have slack time (unused capacity).

The constraint in Process 3 – Assembly stops the company from meeting all demands of PEC1
and PEC2 and will delay some orders or perhaps not fill them out at all. Therefore, the company
must find the best production by determining the throughput margin for each product with a given
constraint. The company must also reschedule non-bottleneck processes operation and
capacity to align with bottleneck processes.

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Step 2: Exploit the bottleneck. Compute the throughput margin:
Calculate throughput margin per minute during constraint time.

PEC-1 PEC-2
Selling price $200 $250

Material A ($30) -
Material B ($80) ($80)
Material C - ($57.50)

*Throughput margin $90 $112.50

(/) Constraint time 45 mins 75 mins

Throughput margin per minute $2 per minute $1.50 per minute

Ranking 1 2

*Throughput margin = Selling price – Direct materials cost

The throughput margin per minute for the PEC-1 and PEC-2 are $2 and $1.50, respectively.
This means that for each minute Process 3 produces PEC-1, the company earns $2. Meanwhile,
each minute used to produce PEC-2 earns only $1.50. Therefore, PEC-1 is the most profitable
product when Process 3 is the constraint.
Therefore, the company must give priority to produce PEC1 and followed by PEC2. The
production of PEC1 and PEC2 is as follows:
Total available minutes with a given constraint at Process 3: 2000 minutes
Production time for PEC1 = 40 units x 45 minutes = 1,800 minutes
Remaining capacity left for PEC-2 = 2,000 minutes – 1,800 minutes = 200 minutes
Production units for PEC-2 = 200 minutes / 75 minutes = 2.667 @ 2 units

With the constraint, the most profitable product mix is 40 units of PEC-1 and 2 units of PEC-2.
Total throughput
Product PEC-1 PEC-2 margin
Production mix 40 2
(x) throughput margin $2 $1.50
Total $80 $3.00 $83.00

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Question 2
1. Determine whether Bakker can meet the monthly sales demand for the three products.
What department, if any, is a constraint?
Step 1: Identify the bottleneck:

Product Product Product Total Total Slack

611 613 615 hours hours
required available
Sales 500 units 400 units 1,000 units
2 x 500 = 1 x 400 = 2 x 1,000 =
Department 1 1000 400 2,000 3,400 3,000 -400
Department 2 1 x 500 = 1 x 400 = 2 x 1,000 = 2,900 3,100 200
500 400 2,000
Department 3 2 x 500 = 0 1 2,000 2,700 700
1,000
Department 4 2 x 500 = 2 x 400 = 1 x 1,000 = 2,800 3,300 500
1,000 800 units 1,000 units

Bakker will not be able to meet the demand. Department 1 is a constraint, based on machine
time. The available machine hours are not enough (3,000 – 3,400 = -400) to cover
the production of 500 units of 611, 400 units of 613, and 1000 units of 615. Therefore, the
bottleneck department is Department 1.

2. What monthly production schedule would be best for Bakker Industries?

The best production schedule can be determined based on the throughput margin with a given
constraint for each product.

Product 611 Product 613 Product 615

Selling price per unit $196 123 167

Variable costs:
Direct materials 7 13 17
Direct labor
Department 1 12 6 12
Department 2 21 14 14
Department 3 24 0 16
Department 4 9 18 9
Total variable costs 73 51 68
Throughput margin 123 72 99
Constraint time (Department 1) (÷) 2 1 2
Throughput margin per hour (ranking) $61.50 (2) 72.00 (1) 49.50 (3)
Throughput margin = selling price – materials cost (question indicates that labour is also a
variable cost)

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The throughput margin per hour for Product 611, Product 613, and Product 615 is $61.50, $72.00,
and $49.50, respectively. This means that each hour department 1 in producing 611 earns $61.50
and earns $72 for 613. Meanwhile, each hour in producing 615 earns only $49.50. Therefore,
Product 613 is the most profitable product with a given constraint at Department 1, followed by
Product 611 and Product 615.
The company will produce Product 611 since it is the most profitable product. Next, the company
determines the remaining capacity in Department 1. Then, using the remaining capacity, the
company can determine how many units of Product 611 and Product 615 can be produced.

Production time for Product 613  400 units x 1 hour = 400 hours

Remaining capacity for Product 611 and Product 615 3,000 hours – 400 hours= 2,600 hours

Production time for Product 611  500 units x 2 hours = 1,000 hours

The remaining time left for Product 615  2,600 hours –1,000 hours=1600 hours

Production units for Product 615  1,600 hours ÷ 2 hours = 800 units

Given the constraint, the most profitable product mix is 400 units of Product 613, 500 units of
Product 611, and 800 units of Product 615. The unmet demand is 200 units of Product 615.