Throughput Costing

Throughput Costing
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A costing methodology that focuses on capacity utilization is called throughput accounting. It assumes that there is always one bottleneck operation in a production process that commands the speed with which products or services can be completed. This operation becomes the defining issue in determining what products should be manufactured first, since this in turn results in differing levels of profitability.
The basic calculation used for throughput accounting is shown below:
Maximum constraint time = 62,200
Throughput $$/minute of Constraint Required Constraint Usage (min.) Unit Demand/ Actual Production Cumulative Constraint Utilization Cumulative Throughput/ Product
19" Color Television $8.11 10 1,000/1,000 10,000 $81,100
100 Watt Stereo 7.50 8 2,800/2,800 22,400 168,000
5" LCD Television 6.21 12 500/500 6,000 37,260
50" High Definition TV 5.00 14 3,800/1,700 23,800 119,000

Throughput total $405,360
Operating expense total $375,000
Profit $30,360
Profit percentage 7.5%
Investment $500,000
Return on investment 6.1%
The exhibit shows a series of electronic devices that a company can choose from for its near-term production requirements. The second column describes the amount of throughput that each of the products generates per minute in the bottleneck operation; “throughput” is the amount of margin left after all direct material costs have been subtracted from revenue. For example, the 19” color television produces $81.10 of throughput, but requires ten minutes of processing time in the bottleneck operation, resulting in throughput per minute of $8.11. The various electronic devices are sorted in the exhibit from top to bottom in order of largest throughput per minute. This ordering tells the user how much of the most profitable products can be produced before the total amount of available time in the bottleneck (which is 62,200 minutes, as noted at the top of the exhibit) is used up. The calculation for bottleneck utilization is shown in the “Unit Demand/Actual Production” column. In that column, the 19” color television has a current demand for 1,000 units, which requires 10,000 minutes of bottleneck time (as shown in the following column). This allocation of bottleneck time progresses downward through the various products until we come to the 50” High Definition TV at the bottom of the list, for which there is only enough bottleneck time left to manufacture 1,700 units.
By multiplying the dollars of throughput per minute times the number of minutes of production time, we arrive at the cumulative throughput dollars resulting from the manufacture (and presumed sale) of each product, which yields a total throughput of $405,360. We then add up all other expenses, totaling $375,000, and subtract them from the total throughput, which gives us a profit of $30,360. These calculation comprise the basic throughput accounting analysis model.
Throughput accounting does a very good job of tightly focusing attention on the priority of production in situations where there is a choice of products that can be manufactured. It can also have an impact on a number of other decisions, such as whether or not to grant volume discounts, outsource manufacturing, stop the creation of a product, or invest in new capital items. Given this wide range of activities, it should find a place in the mix of costing methodologies at many companies.

wow!! this is something really new 2 me !
i undestand its a rally useful concept.

thank you man.I had trouble with this when I had Accounting Module

I understand the concept of throughput costing, but what are the specific benefits of it's use and problems associated with it when comparing throughput costing to absorption costing, and variable costing?

thanks

Originally Posted by faaiz

Throughput Costing
________________________________________
A costing methodology that focuses on capacity utilization is called throughput accounting. It assumes that there is always one bottleneck operation in a production process that commands the speed with which products or services can be completed. This operation becomes the defining issue in determining what products should be manufactured first, since this in turn results in differing levels of profitability.
The basic calculation used for throughput accounting is shown below:
Maximum constraint time = 62,200
Throughput $$/minute of Constraint Required Constraint Usage (min.) Unit Demand/ Actual Production Cumulative Constraint Utilization Cumulative Throughput/ Product
19" Color Television $8.11 10 1,000/1,000 10,000 $81,100
100 Watt Stereo 7.50 8 2,800/2,800 22,400 168,000
5" LCD Television 6.21 12 500/500 6,000 37,260
50" High Definition TV 5.00 14 3,800/1,700 23,800 119,000

Throughput total $405,360
Operating expense total $375,000
Profit $30,360
Profit percentage 7.5%
Investment $500,000
Return on investment 6.1%
The exhibit shows a series of electronic devices that a company can choose from for its near-term production requirements. The second column describes the amount of throughput that each of the products generates per minute in the bottleneck operation; “throughput” is the amount of margin left after all direct material costs have been subtracted from revenue. For example, the 19” color television produces $81.10 of throughput, but requires ten minutes of processing time in the bottleneck operation, resulting in throughput per minute of $8.11. The various electronic devices are sorted in the exhibit from top to bottom in order of largest throughput per minute. This ordering tells the user how much of the most profitable products can be produced before the total amount of available time in the bottleneck (which is 62,200 minutes, as noted at the top of the exhibit) is used up. The calculation for bottleneck utilization is shown in the “Unit Demand/Actual Production” column. In that column, the 19” color television has a current demand for 1,000 units, which requires 10,000 minutes of bottleneck time (as shown in the following column). This allocation of bottleneck time progresses downward through the various products until we come to the 50” High Definition TV at the bottom of the list, for which there is only enough bottleneck time left to manufacture 1,700 units.
By multiplying the dollars of throughput per minute times the number of minutes of production time, we arrive at the cumulative throughput dollars resulting from the manufacture (and presumed sale) of each product, which yields a total throughput of $405,360. We then add up all other expenses, totaling $375,000, and subtract them from the total throughput, which gives us a profit of $30,360. These calculation comprise the basic throughput accounting analysis model.
Throughput accounting does a very good job of tightly focusing attention on the priority of production in situations where there is a choice of products that can be manufactured. It can also have an impact on a number of other decisions, such as whether or not to grant volume discounts, outsource manufacturing, stop the creation of a product, or invest in new capital items. Given this wide range of activities, it should find a place in the mix of costing methodologies at many companies.

As we know that throughout costing is a method of costing a item where only the unit-level direct expenditures are allocated to the item. I am also uploading a document where you would find the more detailed information on throughput costing.