Question

Question on TP accounting and decision making (Product ranking)

I am a bit confused when the question require to rank products to achieve maximum profitability.

Sometimes TP per factory hr is used and sometimes contribution per limiting factor is used.

I don't know when to use TP per factory hr and when to use contribution per limiting factor

Answer 1

You have to differentiate between these two there is a difference between the marginal costing approach and the throughput accounting approach. If the question asks you to rank using throughput accounting, you will notice that you take the selling price less the material price ONLY and you will get the throughput return then you divide by the hours and then rank taking first the one which gives higher return.    However in marginal costing approach instead of substracting only materials from the selling price, ALL VARIABLE COSTS should be substracted and then obtain what we call CONTRIBUTION and afterward dividing it per hour you will get contribution per hour.

Comments

Thanks alot for the clarification Tiziana, appreciate it. But based on what we rank products based on TP or Contribution? will it be mentioned clearly to use the throughput accounting method?

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as far as I know it will be stated because till now, I did not see a question in which it is not specified. But I came across a question stating to rank the products and so when it is not stated it is supposed to be the contribution and not the throuput

Answer 2

I found a question in Kaplan book that was solved by ranking products using TP, however it was not mentioned explicitly in the question, but maybe because "Bottleneck" word was used?

Answer 3

This also confused me at first too. I’ve found unless throughput is specifically mentioned then use contribution to rank. If there is no mention of throughput then assume it is to do with limiting factors instead and use contribution.

Answer 4

Also, I’ve found that Kaplan does have mistakes in the books. The exam should be more clear of the mention throughput