Throughput Accounting Quiz
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Questions and Answers

What is the primary focus of throughput accounting?

  • Minimizing costs across all departments
  • Analyzing the overall industry trends
  • Maximizing profits through efficient production (correct)
  • Tracking fixed costs of production

    • Throughput is calculated by subtracting totally variable costs from sales value.

    True

    Define throughput efficiency.

    Throughput efficiency is the relation of throughput achieved to resources used.

    A capacity constraint is a resource that limits a company's __________.

    <p>total output</p> Signup and view all the answers

    Match the following terms with their correct definitions:

    <p>Throughput = Sales value minus totally variable costs Totally Variable Cost = Cost incurred only if a product is produced Capacity Constraint = Resource limiting total output Throughput Time = Average time for converting raw materials to finished goods</p> Signup and view all the answers

    Which of the following costs is typically considered totally variable?

    <p>Direct materials</p> Signup and view all the answers

    Throughput accounting is designed to complement principles of Just-In-Time (JIT) management.

    <p>True</p> Signup and view all the answers

    What does throughput (or cycle) time measure?

    <p>The average time required to convert raw materials into finished goods.</p> Signup and view all the answers

    What does throughput efficiency measure?

    <p>The relationship between throughput cost and actual factory cost</p> Signup and view all the answers

    The throughput time ratio is the ratio of value-added time to the total cycle time.

    <p>True</p> Signup and view all the answers

    What is the primary focus of throughput accounting regarding costs?

    <p>Totally variable costs</p> Signup and view all the answers

    In throughput accounting, _______________ is the sum of all company expenses.

    <p>operating expenses</p> Signup and view all the answers

    Match the following terms with their descriptions:

    <p>Throughput Efficiency = Ratio of throughput cost to actual factory cost MRT = Manufacturing Response Time Total Factory Cost = Mostly fixed costs in the short run Profitability = Rate of meeting customer demands</p> Signup and view all the answers

    Which statement best describes the relationship between manufacturing response time (MRT) and profit?

    <p>Profit is inversely proportional to MRT</p> Signup and view all the answers

    Production for stock always creates profits in a throughput accounting model.

    <p>False</p> Signup and view all the answers

    What is the definition of 'Investment' in the context provided?

    <p>Application of funds intended to provide a return</p> Signup and view all the answers

    What is the primary focus of throughput accounting?

    <p>Determining costs based solely on unit level spending</p> Signup and view all the answers

    Throughput accounting allows the average cost per unit to be influenced by how many units are made.

    <p>False</p> Signup and view all the answers

    What are the five focusing steps in the theory of constraints?

    <p>Identify the bottleneck, exploit the bottleneck, subordinate to the bottleneck, augment the capacity, identify new bottlenecks.</p> Signup and view all the answers

    The first step in the theory of constraints involves identifying the ______ in the system.

    <p>bottleneck</p> Signup and view all the answers

    Match the following steps to their descriptions in the theory of constraints:

    <p>Identify the bottleneck = Locate the limiting factor in the process Exploit the bottleneck = Maximize the use of the bottleneck resource Subordinate = Align other processes around the bottleneck Augment capacity = Increase the bottleneck's capacity with minimal investment</p> Signup and view all the answers

    What is a potential problem with throughput accounting?

    <p>Customer orders may not be filled if profit levels are sub-optimal</p> Signup and view all the answers

    In throughput accounting, all costs are considered to be fixed in the long run.

    <p>False</p> Signup and view all the answers

    What must cost management analysts distinguish between when using throughput accounting?

    <p>Spending for resources based on production decisions and committed resources supplied regardless of production levels.</p> Signup and view all the answers

    What does the throughput model use for the cost of goods sold in the income statement?

    <p>Direct materials only</p> Signup and view all the answers

    Throughput accounting charges operating expenses to inventory.

    <p>False</p> Signup and view all the answers

    What is the term used for the financial result calculated in the throughput model instead of gross margin?

    <p>throughput contribution</p> Signup and view all the answers

    Throughput accounting eliminates the incentive for managers to ________ to improve financial results.

    <p>overproduce</p> Signup and view all the answers

    Which accounting method holds that the highest margin products should always be produced first?

    <p>Traditional cost accounting</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Throughput Contribution = Financial result focusing on direct materials Operating Expenses = Costs incurred in the current period Inventory Valuation = Apportioning costs to inventory Traditional Cost Accounting = Method that emphasizes overhead costs</p> Signup and view all the answers

    All financial reports remain unchanged when adopting throughput accounting.

    <p>True</p> Signup and view all the answers

    What is a main challenge to the acceptance of throughput accounting?

    <p>Lack of logical linkage with traditional accounting</p> Signup and view all the answers

    What is the main advantage of throughput accounting in production scheduling?

    <p>It identifies which orders should be produced first for higher throughput.</p> Signup and view all the answers

    Traditional production systems prioritize throughput accounting over existing customer orders.

    <p>False</p> Signup and view all the answers

    What should a company do when it has received a customer order?

    <p>Fulfill the order, even if it reduces overall profit.</p> Signup and view all the answers

    Throughput accounting focuses on maximizing _____ through long-term planning by estimating sales levels.

    <p>profitability</p> Signup and view all the answers

    Which of the following is a main application area of throughput accounting?

    <p>Long-term planning</p> Signup and view all the answers

    Sales and marketing staff prefer throughput accounting due to its complexity in cost allocation.

    <p>False</p> Signup and view all the answers

    What is the key difference between throughput accounting and activity-based costing?

    <p>Throughput accounting simplifies margin calculation while activity-based costing involves complex cost allocations.</p> Signup and view all the answers

    Match the following concepts related to throughput accounting with their descriptions:

    <p>Throughput Accounting = Focuses on maximizing profitability with a simplified margin calculation Traditional Planning = Obligation to fulfill existing customer orders Long-term Planning = Estimates sales levels for product mix decisions Price Setting = Focuses on prices that incrementally increase profitability</p> Signup and view all the answers

    Study Notes

    Throughput Accounting

    • Throughput Accounting is a management accounting technique used to maximize profits, focusing on generating more throughput by increasing production velocity.
    • It is based on identifying and managing the "bottleneck" or constraint that limits overall output.

    Key Terms

    • Throughput: Represents the difference between sales revenue and totally variable costs.
    • Totally Variable Costs: Incurred only when a product is produced, often limited to direct materials, excluding direct labor unless piece rate wages are paid.
    • Capacity Constraints: Resources that limit total output, often a machine or process that can only produce a specified amount in a given time.
    • Throughput (or Cycle) Time: The average time taken to transform raw materials into finished goods ready for shipment.
    • Throughput Efficiency: The relationship between throughput achieved and resources used, calculated by dividing throughput cost by actual factory cost.
    • Throughput Time Ratio: The proportion of customer value-adding time to the total cycle time.
    • Operating Expenses: Include all company costs, excluding totally variable costs. They are considered the price paid for maintaining capacity.
    • Investment: Funds used to generate returns, with emphasis placed on working capital.
    • Total Factory Costs (TFC): Primarily fixed costs in the short term, including direct labor and other manufacturing expenses.
    • Manufacturing Response Time (MRT): The time taken to fulfill customer orders, with shorter response times leading to greater profit: Profit = 1/MRT.
    • Profitability: Determined by the speed at which goods are produced to meet customer orders.

    Steps to Increase Throughput

    • Identify the Bottleneck: Determine the limiting factor in production, such as machine capacity.
    • Exploit the Bottleneck: Maximize the utilization of the bottleneck resource to produce as many goods as possible.
    • Subordinate All Other Activities: Align production schedules to the capacity of the bottleneck resource.
    • Augment Bottleneck Capacity: Increase the capacity of the bottleneck with minimal capital investment.
    • Identify New Bottlenecks: Repeat the process for new constraints that emerge.

    Problems with Throughput Accounting

    • Neglecting customer orders that result in lower profit margins for the sake of maximizing overall throughput.
    • Reliance on production scheduling staff to determine which products to manufacture and in what order.
    • Treating all costs as variable in the long term, potentially leading to inaccurate cost estimations.

    Reporting under Throughput Accounting

    • Income statement includes only direct materials in cost of goods sold, resulting in a "throughput contribution" instead of gross margin.
    • All other costs are grouped under "Operating Expenses."
    • Prevents managers from overproducing to shift expenses to future periods, eliminating incentives for unproductive behavior.

    Systematic Changes and Integration

    • Inventory Valuation: Conflicting with GAAP standards, which require overhead allocation to inventory.
    • Inventory Investment Analysis: Significant differences in methodologies.
    • Production Scheduling: Can partially integrate with existing systems.
    • Long-Term Planning: Ideal for strategic decision making, as it avoids the issues associated with existing customer orders.
    • Price Setting: Improves profitability by focusing on product mix that maximizes throughput, rather than allocating costs to specific products.

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    Description

    Test your knowledge of Throughput Accounting, a management technique focused on maximizing profits by improving production velocity. This quiz covers key terms such as throughput, capacity constraints, and throughput efficiency. Challenge yourself to understand how managing constraints can influence overall output.

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