Kristelle Joy A.

De la Cruz
BSA III

Illustrative Problem @27.3. Theory of Constraints, Throughput

Contribution, Quality, Relevant Costs
Basic Data on Columbia Industries follow:
Columbia Industries manufactures electronic testing equipment.
Columbia also installs the equipment at customers sites and ensures that it
functions smoothly. Additional information on the Manufacturing and
installation departments is as follows (capacities are expressed in terms of
the number if units if electronic testing equipment):

Annual Capacity
Equipment
installed

manufactured

Equipment
Equipment Installed
Manufactured
400 units per 300 units per year
year
and 300 units per
year
300 units per year

Columbia manufactures only 300 units per year because the

Installation Department has only enough capacity to install 300 units. The
equipment sells for 40,000 pr unit (installed) and has direct material costs of
15,000. All costs other than direct materials costs are fixed.
Case I
Columbias engineers have found a way to reduce equipment
manufacturing time. The new method would cost an additional P50 per unit
and would allow Columbia to manufacture 20 additional units a year. Should
Columbia implement the new method?
Answer:
It will cost Columbia P50 per unit
manufacturing is not a bottleneck
manufacturing more equipment will
contribution. Columbia Industries
manufacturing method.

to reduce manufacturing time. But

operation; installation is. Therefore,
not increase sales and throughput
should not implement the new

Case II
Columbias designer have proposed a changed in direct materials that
would increase direct materials costs by P2,000 per unit. This change would

enable Columbia to install 320 units of equipment each year. If Columbia

makes the change, it will implement the new design on all equipment sold.
Should Columbia use the new design?

Answer:
Additional relevant costs of new direct materials
2,000 x 320 units

P640,000

Increase in throughput contribution, P25,000 x 20 units

P500,000
The additional incremental costs exceed the benefits from higher throughput
contribution by 140,000, so Columbia Industries should not implement the
new design.
Alternatively, compare throughput under each alternative.
Current throughput contribution is p25,000 x 300
P7,500,00
With the modification, throughput contribution is
P23,000 x 320

P7,360,000

The current throughput contribution is greater than the throughput

contribution resulting from the proposed change in direct materials. Hence,
Columbia Industries should not implement the new design.
Case III
A new installation technique has been developed that enable
Columbias Engineers to install 10 additional units of equipment a year. The
new method will increase installation costs by P50,000 each year. Should
Columbia implement the new the technique.
Answer:
Increase in throughput contribution, P25,000 x 10 units
P250,000

Increase in relevant cost

50,000

The additional throughput contribution exceeds incremental costs by

P200,000, so Columbia Industries should the new installation technique.
Case IV
Columbia is considering how to motivate workers to improve their
productivity (Output per hour). One proposal is to evaluate and compensate
workers in the Manufacturing and Installation departments on the basis of
their productivities. Is the new proposal a good idea?
Answer:
Motivating installation workers to increase productivity is worthwhile because
installation is a bottleneck operation, and any increase in productivity at the
bottleneck will increase throughput contribution. On the other hand,
motivating workers in the manufacturing department to increase productivity
is not worthwhile. Manufacturing is not a bottleneck operation, so any
increase in output will result only in extra inventory of equipment as the
installation department needs, not to produce sd much as it can. Under these
circumstances, it would not be a good idea to evaluate and compensate
manufacturing workers on the basis of their productivity.

The Internal Accounting System

Objectives and Characteristics of an Internal Accounting
System
The objectives of an internal accounting system include goals relevant
on a daily basis and long-term goals to ensure a business' accounting
department can plan ahead for future financial projects. The internal
accounting system must have specific characteristics to reach each of these
accounting objectives and to ease the work of all accounting employees
using the system.
1. Short-Term Objectives
o Short-term objectives of an internal accounting system includes
completing daily accounting tasks, like completing payroll for the
company's employees and tracking all income sums and
purchases. Preparing the monthly budget for each department is
also a major responsibility. An internal accounting system must
make these tasks simple for accounting employees.

2. Long-Term Objectives
o Long-term objectives of an internal accounting system include
producing and writing annual financial reports using data from an
annual fiscal period, using the data to make improved financial
decisions for the company and preparing financial proposals for
company projects. An internal accounting system that can
provide accurate financial data and present it an organized and
reliable manner helps achieve these objectives.
3. Usability and Operations
o The usability of an internal accounting system makes it easier for
a company to reach its short-term and long-term accounting
objectives. The system must be easy to use in terms of its
operational tasks, including updating income statements and
amounts, tracking all purchases by the business and using the
system to calculate any discounts or taxes the company needs
throughout a fiscal period. In addition, the system must be easy
to use in case new employees need to be trained.

4. Employee Control
o Employee control over the internal accounting system is another
important characteristic to reach the objectives of an accounting
department. Employees must be able to access the system and
control the cash-flow of the business to prevent and handle
situations of fraud, internal theft and making changes to the
budget to suit financial plans. Access to the system is also
important in case a manager has misused the system or made
flawed decisions

When Should
Changed?

The

Internal

Accounting

System

Be

There is no such thing as the ideal management accounting system.

Each organization has different circumstances that lead to different
management accounting decisions.

Accounting must continually deal w/ trade-offs among external users

wanting information describing performance and internal users
wanting information for decision making and control.
Signs that Indicate that the Internal Accounting System is Not
Working Well
Dysfunctional behavior on the part of the managers because of
poorly chosen performance measures.
Poor operating decisions

Often changes in customers organizational architectures cause

suppliers to change their architecture (and accounting systems).
Organizations should not necessarily take the latest management
accounting fad to give them direction in changing their management
accounting systems.
The internal accounting system is performing two separate roles, it is
decision making and control.
In its decision making role, the accounting system is the first place
managers turn to help them estimate opportunity costs. However,
accounting numbers are not forward-looking opportunity costs.
Accounting systems record historical costs, which are backward
looking. Therefore, accounting numbers are useful for decision making
only under way strong assumptions, primarily that the future will look
like the past.

Reference:

Ma. Elenita Cabrera

Management Accounting
http://www.ehow.com/info_8314265_objectives-characteristics-internalaccounting-system.html