Accounting for Managers: Interpreting accounting information for decision-making

128 ACCOUNTING FOR MANAGERS

Table 9.2 Beaufort accessories – product ranking based on

contribution

Part F Part G Part H

Contribution per unit £50 £60 £60

Machine hours per unit 2 4 5

Contribution per machine hour £25 £15 £12

Ranking (preference) 1 2 3

The first step is to identify the ranking of the products by calculating the
contribution per unit of the limiting factor (machine hours in this case) for each
product. This is shown in Table 9.2.
Although both Part G and Part H have higher contributions per unit, the
contribution per machine hour (the unit of limited capacity) is higher for Part F.
Profitability will be maximized by using the limited capacity to produce as many
Part Fs as can be sold, followed by Part Gs. Based on this ranking, the available
production capacity can be allocated as follows:

Production Contribution

2,000 of Part F @ 2 hours= 4 ,000 hours. 2,000 @ £50 per unit=£100,000

Based on the capacity limitation of

10,000 hours, there are 6,000 hours

remaining, so Beaufort can produce 3/4

of the demand for Part G (6,000 hours

available/8,000 hours to meet demand)

equivalent to 1,500 units of part G (3/4

of 2,000 units).

1,500 of Part G @ 4 hours= 6 ,000 hours 1,500 @ £60 per unit=£90,000

Maximum contribution £190,000

There is no available capacity for Part H.

Theory of Constraints....................................

A different approach to limited capacity was developed by Goldratt and Cox
(1986), who focused on the existence of bottlenecks in production and the need
to maximize volume through the bottleneck (throughput). Goldratt and Cox
developed the Theory of Constraints (ToC), under which only three aspects
of performance are important: throughput contribution, operating expense and
inventory.Throughput contributionis defined as sales revenue less the cost
of materials:

throughput contribution=sales−cost of materials