Management Accounting

p.16.15 Explain the theory of constraints. What implications does this theory have for managing costs?

The theory of constraints suggest that we are able to manage costs, improve product’s/service quality, and delivery performance by identifying and eliminating bottlenecks in our production process.

This theory implies that eliminating bottlenecks in our production process should be the main priority for managers because bottlenecks imposed limitation on the rate of output that can be produced by other departments i.e. they cannot exceed the output produced by the bottleneck department/area. Any attempt to improve efficiency in non-bottleneck areas would be useless because this will simply lead to build up of inventory.

(Langfield-Smith et al 2012)

16.16 According to throughput accounting, how should performance be measured at the operations level? What advantages and disadvantages do these measures offer?

Throughput accounting proposed that performance should be measured using financial measures such as net profit, return on investment (ROI), and cash flow. It ignores the importance of customer satisfaction, quality and flexibility, etc because it assumes that the ultimate goal of a business is to make money.

Advantages of throughput:

• “Eliminate the problem of linking operational measures to business profitability because operational measures are financial” ((Langfield-Smith et al 2012)

• Throughput accounting focuses on removal of constraints in the short term, which is often true because constraint once identified can be tackled in short period.

Disadvantages of throughput:

• Only focuses on short-term performance and ignores the strategic performance in the long run.

• Businesses need to identify long term objectives in order to survive and grow continuously.

P.16.30

(1) Current throughput is 35 units. It would be a good idea to increase the rate of output of Department B since it is the bottleneck. Throughput after efficiency drive in...