7894508 theory of constraints management accounting .ppt

TOC-Chapter-1.pptx

1. Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
THE THEORY OF CONSTRAINTS AND
THROUGHPUT ACCOUNTING
Teaching Slides

2. Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
Boys on a Hike
Drum Beats
Buffer of
Unwalked Trail
Herbie
Rob
Davey
Walked
Trail
Unwalked
Trail
JohnPaul
Mark
Carl

3. Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
What represents the production operations?
What represents the raw materials inventory?
What represents walked trail?
What was the constraint in this specific hiking process?
Boys on a Hike

4. Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
Drum-Buffer-Rope System
Purpose of drum signals and schedules
Purpose of rope signals and schedules
Purpose of buffer inventory

5. Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
Drums, Buffers, and Ropes in
a Production Process
(Exhibit 2)

6. Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
Product
Concept &
Feasibility
Product Strategy
and Plans
Product /
Process
Design &
Development
Production
and
Logistics
Management Accounting Tools:
 Multi-Year Product and Profit Plan
 Target Costing
 Competitor Cost and Technology Analysis
 Capital Budgeting
 Capacity Planning
 Others
Product Development Cycle
Operational Tools:
 Kaizen
 Root Cause Analysis
 ABM/C
 Learning Curve
 SPC
 Benchmarking
 Others
Before Release to Production After Release to Production
 TOC
D:\Modules\Figure from TC
Exhibit 1
Strategic Position of TOC

7. Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
The Five-Step TOC Process
Step 1. Identify the system's constraint(s).
Step 2. Decide how to exploit the system's
constraint(s).
Step 3. Subordinate everything else to the above
decision.
Step 4. Elevate the constraint(s).
Step 5. If a constraint has been broken, go back to
step 1.

8. Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
Breaking Constraints for
Continuous Improvement
(Kaizan) using TOC
(Exhibit 6)

9. Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
New Accounting Definitions
Throughput
–Sales less Direct Materials (and out-of-pocket selling costs, if
any)
Operating Expense
–All costs of production other than costs of Direct Materials

10. Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
Comparing Three P&L
Statements
(Exhibit 7)
a
Sales Price is $5,000 per ton, 100 tons produced and sold
b
Direct Materials ($50,000) + Direct Labor ($20,000) + Variable Manufacturing Overhead ($15,000) +
Variable Selling & General Administrative Expense ($70,000)
c
Fixed Manufacturing Overhead ($35,000) + Fixed Selling & General Administrative Expense ($280,000)
d
All costs in the organization other than Direct Materials.
GAAP Basis Contribution Margin Basis Throughput Basis
Revenue $500,000
a
Revenue $500,000
a
Revenue $500,000
a
Cost of Goods Sold (120,000) Variable Costs
b
(155,000) Direct Materials( 50,000)
Gross Margin $380,000Contribution Margin$345,000Throughput Margin$450,000
Sell. & Gen. Admin. Exp.(350,000) Fixed Costs
c
(315,000) Operating Expense
d
(420,000)
Operating Income $ 30,000 Operating Income$ 30,000 Operating Income$ 30,000

11. Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
Differences Between GAAP
and Throughput Accounting
(Exhibit 8)
Assumptions: Sales price is $5,000 per ton; Materials costs are $500 per ton, Conversion costs (labor and
manufacturing overhead are $70,000 per period
GAAP Basis Throughput Basis
Scenario 1:
Production
equals sales
Scenario 2:
Build
Inventory
Scenario 3:
Shrink
Inventory
Scenario 1:
Production
equals sales
Scenario 2:
Build
Inventory
Scenario 3:
Shrink
Inventory
Sales 100 tons100 tons100 tons100 tons100 tons100 tons
Production 100 tons110 tons 90 tons100 tons110 tons 90 tons
Revenue $500,000$500,000$500,000$500,000$500,000$500,000
Expenses:
Materials 50,000
a
50,000
a
50,000
a
50,000
b
55,000
c
45,000
d
Conversion 70,000
e
63,636
f
77,778
g
70,000
h
70,000
h
70,000
h
Sell. & Gen. Admin. Exp. 350,000 350,000 350,000 350,000 350,000 350,000
Operating Income $ 30,000$ 36,364$ 22,222$ 30,000$ 25,000$ 35,000
Calculations:
a
100 tons sold x $500 per ton
e
100 tons sold x ($70,000  100 tons produced )
b
100 tons produced x $500 per ton
f
100 tons sold x ($70,000  110 tons produced)
c
110 tons produced x $500 per ton
g
100 tons sold x ($70,000  90 tons produced)
d
90 tons produced x $500 per ton
h
Assumed fixed in the short run at $70,000 per period
___________ ___________ ___________ ___________ ___________ ___________

12. Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
P&L Statement Based on
Throughput Margin Analysis
Revenues:
(100 sticks x $55/stick)
(36 bats x $60/bat)
Total revenue
Less raw material costs:
(100 sticks x $20/stick)
(36 bats x $13/bat)
Throughput Value
Less operating expenses:
Weekly profit
$2,000
468
$5,500
2,160
$7,660
(2,468)
$5,192
(3,000)
$2,192

13. Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
Technical Attributes
(Exhibit 9)

14. Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
Behavioral Attributes
Benefits
–Sub-optimal behavior
–Communication
Risks
–Reducing slack in non-bottlenecks
–Inattention to non-bottlenecks
–Operational versus Strategic management focus

15. Copyright, Ansari, Bell, Klammer and Lawrence, Management
Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
Cultural Attributes
(Exhibit 14)
Prior Assumption Current Fact
Keeping people busy is the key to making money.A focus on labor utilization hinders cash flow due
to high inventory and the emphasis on keeping
people busy.
By keeping utilization high, employees help the
company perform well financially.
High utilization of resources does not correlate to
profitability.
High labor-utilization rates ensure high levels of
customer satisfaction.
High utilization of resources does not necessarily
correlate to high customer satisfaction.
If managers release workers to other areas of the
operation, they may not get them back when they
need them.
Managers will willingly release workers to go
where the work is when right performance
measures are used.
Traditional accounting standards tell managers
whether they are effective as a total enterprise.
Traditional standards are subjective, inaccurate,
and require constant monitoring.
Maximizing the production output per setup and
building inventory is key to making money.
Making only what customers order is the key to
making money, and on-time delivery is the critical
success factor.