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Throughput Accounting (TPA) (How to improve TPA ratio (increase the ratio)…
Throughput Accounting (TPA)
Theory of Constraints (TOC)
key financial concept is to maximize of throughput while keeping conversion & investment costs to a minimum
Throughput = Sales revenue - Direct Material Cost
TOC focus on bottlenecks in the production process which act as a barrier to throughput maximization
Goldratt's 5 Steps
Step 1 : Identify the binding constraint (bottleneck)
Step 2 : Exploit, highest output must be achieved from bottleneck
Step 3 :Subordinate, operate at same speed so WIP does not build up
Step 4 : Elevate,by improving the efficiency
Step 5 : return to step 1
TPA
based on binding constraints
use JIT environment because of the emphasis on throughput, inventory minimization and cost control
all factory costs are fixed except for material cost
accepting idle time in non bottleneck operations by producing JIT
profit is determined by the rate at which throughput can generate
Calculating / Formula
total factory costs = fixed production costs including labour
return per factory hour = (sales - material)/ time on resources (LF)
cost per factory hours = total factory costs/ total time on resources (total LF)
TPAR = return per factory hour / cost per factory hour
TPA and decision making
Ranking
single : products/division are ranked by TPAR
more products made in same factory, ranked on return per factory hour
target for decision making
TPAR should be greater than one
return per hour enables business to make short-term decisions when there is a scarce resources
priority to products with best ratios
use in performance management
a division is not discouraged from build up inventory
production costs should only be incurred if there is an immediate return generated
How to improve TPA ratio (increase the ratio)
increase the TP per bottleneck hour
reduce the operating cost per bottleneck hour
increase the selling price
reduce material cost per unit
reduce expenditure on operating costs
improve efficiency of the bottleneck hour
elevate the bottleneck so that more hours available for the bottleneck resources