Bottleneck resource – Throughput accounting – ACCA Performance Management (PM)
How do bottlenecks work?
A bottleneck occurs when a manufacturing step is slower than other essential steps and its speed limits the amount of product that can be produced. When an earlier stage of the manufacturing process suddenly increases output, bottlenecks may develop. For instance, if a company that makes cellphones acquires new equipment that accelerates production, the subsequent packaging step might become overburdened.
Another factor that might cause a bottleneck is an unexpected rise in consumer demand. This can occur when a significant quantity of a product arrives unexpectedly at a step that was previously able to handle the usual volume of orders. Bottlenecks can also develop when a process component’s capacity suddenly decreases. This might occur, for instance, if a piece of crucial equipment malfunctions or if staffing shortages during the holidays cause the workforce to shrink.
What is a bottleneck in accounting?
A bottleneck, also known as a constraint, is a step in the manufacturing process that limits the rate of production. The business could conceivably produce the product more quickly without the bottleneck. Bottlenecks are important in managerial accounting because they restrict a company’s ability to produce a good, lowering sales potential and profit.
Impact of accounting bottlenecks
Following are a few possible bottleneck effects from an accounting perspective:
How to manage bottlenecks in accounting
There are five essential steps to managing bottlenecks in managerial accounting. This framework is the theory of constraints. The actions listed below can assist you in lessening the effects of accounting bottlenecks:
1. Identify the bottleneck
The first step is to determine what is slowing down production. Limitations may include the number of labor or machine hours, the number of plant operating hours, or the amount of facility space. These restrictions may already be present or may arise as a result of developments within the business or other factors beyond its control. Sometimes, eliminating a previously identified bottleneck causes the emergence of a new constraint.
A doll factory might resolve a bottleneck at the level of assembling the doll’s parts only to discover that there aren’t enough painting machines to handle all the new dolls. This is an illustration of a new bottleneck. In this case, a new bottleneck would appear at the painting step.
2. Optimize the constraint
Once you know which resource is limiting production, you can look for strategies to maximize profits despite the resource’s scarcity. Calculating the contribution margin (CM) of each product per unit of the constrained resource is one approach to accomplishing this. The CM is equal to the sales price of the item less its variable cost. For instance, a pair of shoes with a $35 sales price and a $25 variable cost have a $10 CM.
Divide the CM by the constrained resource after calculating the CM for each product. For instance, a shoe company has identified suede as a resource that is limited. Shoe A’s CM per dollar of suede is $5 if it costs $2 to produce and has a CM of $10. The managerial accountant may advise producing more of shoe B if it has a CM of $7 per dollar of suede in order to make the best use of this scarce resource. It is best to produce the most profitable product per unit of the limited resource since the objective is to maximize profit from it.
3. Prioritize the bottleneck by sending non-bottleneck resources to the bottleneck
Sometimes, other production process steps use limited resources without constraint. There might be other steps that also require labor but have enough workers if the limited resource is labor hours, for instance. As a result, despite requiring the same resource, these other steps would not be experiencing a bottleneck. Some employees may be trained by the business to transition from a non-bottleneck step to the bottleneck. This can lessen the stress that was brought on by a finite amount of labor hours.
4. Improve the bottleneck step
Sometimes, step three will ease the bottleneck. Making the bottleneck step more productive and reducing its reliance on the constrained resource is the fourth step to take if it still exists or if you want to put the reprioritized resources back where they originally belonged. For instance, the business could buy more or faster ovens if the limited resource was oven space.
5. Return to the first step and repeat the process for new bottlenecks
When the identified bottleneck is removed, you might create a new bottleneck somewhere else. For instance, if you can make adjustments that speed up the production of a toy doll, you might then discover that there is not enough staff to package the dolls and get them ready for shipping. The packaging station may become overcrowded with dolls as a result, creating a new bottleneck. To handle the new bottleneck, you would then repeat the previous steps.
Great Hats, Inc. creates baseball caps with messages from popular culture stitched on the brim Great Hats, Inc. produces two hat designs: a flexible-brimmed hat and a stiff-brimed hat. Recently, a very effective marketing initiative led to an increase in demand for both types of hats. The managerial accountants at Great Hats, Inc. noticed that the daily production of hats hadn’t increased enough to meet the new demand.
They identified that the constraint was embroidery machine time. They suggested maximizing production of the flexible brim hat because it generated a higher profit per minute of machine time. They recommended purchasing additional machines to permanently relieve the bottleneck after borrowing extra embroidery machines from another department.
Please note that Indeed is not affiliated with any of the businesses mentioned in this article.
What is a bottleneck example?
A bottleneck is a point of congestion in a production system (like an assembly line or a computer network) that develops when workloads come in too quickly for the production process to handle. The bottleneck’s inefficiencies frequently result in delays and higher production costs.
What are bottlenecks in budgeting?
For instance, the entire process would be slowed down if a senior manager took too long to approve a task that was a requirement for another task (i). e. they are the bottleneck).