Theory of Constraints Handbook - James Cox Iii [248]
Three elements in Fig. 13-1 have darker outlines because their output is required in more than one product. Resource 1, task 2, and Resource 2, task 3 produce a common component from Raw Material #3 that is used in both Product X and Product Y.
Figure 13-1 shows a production view (combining both bills of materials [BOMs] and routings for items flowing through the facility) of the organization’s operations where each of the four resources can perform different tasks. A typical accounting view would show the materials flowing through four stationary resources.
FIGURE 13-1 Product flows through resources for a simple company.
Within five minutes, most people familiar with TOC concepts recognize that Resource 2 does not have sufficient capacity to produce all units demanded and therefore would compute the Throughput (contribution margin) per minute required of Resource 2 as follows:
Product X: $300 – $60 materials – $8 VMOH – $32 VSC = $200/(20 min of Res. 2) = $10.00/min
Product Y: $260 – $50 materials – $5 VMOH – $22 VSC = $183/(20 min of Res. 2) = $9.15/min
Product Z: $195 – $45 materials – $2 VMOH – $15 VSC = $133/(5 min of Res. 2) = $26.60/min
TABLE 13-1 Demand, Selling Prices, and Variable Costs
TABLE 13-2 Additional Information
TABLE 13-3 Operating Profit Resulting from Various Accounting Priorities
Therefore, product priority would be Product Z, then Product X, then Product Y. Weekly income would be computed as $12,858 (total Throughput—or contribution margin—of $30,470 minus total fixed costs of $17,612), using all 2400 minutes of Resource 2.18
Following reasonable assumptions,19 the traditional gross profit or gross margin approach would result in first priority going to Product Y, then X, then Z. (See a complete list of 13 assumptions, some of which we will not need for the examples in this chapter, in a spreadsheet, “Throughput_Examples”)20 Similarly, ABC21 would result in gross profit priorities of Product X, then Y, then Z. Table 13-3 compares the operating income (for simplicity, taxes are ignored) for four methods (Throughput, traditional, traditional contribution margin, and ABC).
Once the best product mix is determined, a formal master budget can be prepared.
Preparing a Throughput Budget
Throughput budgeting would follow the same general flow as that described in the section on traditional budgeting, but with conscious consideration of a possible internal constraint. The budget preparation process best proceeds when production provides the following data: (1) BOM for each product; (2) routing for each product; (3) prioritized expected sales of each product; (4) required inventory sizes; (5) available resource capacities; and (6) proposed acquisition of land, buildings, or equipment during the period.
With an internal constraint, the budget process would begin with the estimated production of the most profitable product mix (in units), and consideration of constraint availability. Then estimated sales (in units and in total revenues), production costs, and all other elements of a traditional budget would be prepared. Following preparation of the cash budget, the income statement would be prepared in two formats: the direct costing format used by Throughput accounting22,23 and the traditional GAAP format (revenues minus cost of sales, subtotaled into gross profit, minus general, selling, and administrative expenses to find operating profit). (See a complete treatment of Throughput budgeting in Bragg, 2007b, Chapter 5.)
The Throughput budget would be used for planning purposes only, and not for control as traditionally practiced.
Throughput Control
TOC maintains