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Throughput Accounting 2 · Lesson 6 of 6

Final case: the shirt factory

Put the whole course to work on a new plant. Find the constraint, choose the product mix, judge two improvement proposals and spot an inventory profit, then check yourself against the cost report.

20 min · Not completed yet

The case

A garment factory makes two products. Work the case with a pencil first, then use the plant below to check your answers.

Women’s shirt Men’s shirt
Demand a week 120 120
Price ₹105 ₹100
Raw material ₹45 ₹50
Cutting time 2 min 10 min
Sewing time 15 min 10 min

Cutting and sewing each have one operator and 2,400 minutes a week. Each operator is paid ₹200 a week; other indirect costs are ₹10,100 a week. So operating expense is ₹10,500 a week.

Part A: what the cost report says

Spread ₹10,500 over the 4,800 minutes available: ₹2.1875 a minute.

1. Using the cost report, what are the margins?

  • Women’s ₹60, men’s ₹50
  • Women’s ₹22.81, men’s ₹6.25
  • Women’s ₹6.25, men’s ₹22.81
  • Both about ₹15

Women’s: 17 minutes × ₹2.1875 = ₹37.19 of overhead; ₹45 + ₹37.19 = ₹82.19; margin ₹105 − ₹82.19 = ₹22.81. Men’s: 20 × ₹2.1875 = ₹43.75; ₹50 + ₹43.75 = ₹93.75; margin ₹6.25. The report says: push women’s shirts.

Part B: find the constraint

2. Can the factory make everything? If not, where is the constraint?

  • Yes, both resources have spare time
  • No, cutting needs 1,440 minutes
  • No, the market is the constraint
  • No, sewing needs 3,000 minutes and has 2,400

Sewing: 120 × 15 + 120 × 10 = 3,000 minutes. Cutting: 120 × 2 + 120 × 10 = 1,440, well within 2,400.

3. What is the throughput per sewing minute of each shirt?

  • Women’s ₹4, men’s ₹5
  • Women’s ₹5, men’s ₹4
  • Women’s ₹60, men’s ₹50
  • Both ₹4.50

Women’s: (₹105 − ₹45) ÷ 15 = ₹4. Men’s: (₹100 − ₹50) ÷ 10 = ₹5. Men’s shirts earn more per minute of the constraint, the opposite of the cost report.

Part C: the product mix

Now plan the week. Check whether the cost report’s choice or yours makes more money.

Men’s first: 120 men’s shirts use 1,200 sewing minutes; the remaining 1,200 make 80 women’s shirts. Throughput is 120 × ₹50 + 80 × ₹60 = ₹10,800, a profit of ₹300. Women’s first: 120 women’s shirts use 1,800 minutes, leaving enough for 60 men’s: ₹10,200 of throughput, a loss of ₹300.

Part D: two proposals

Engineering offers two improvements:

  1. ₹1,050 of tooling cuts the cutting time of a men’s shirt from 10 to 8 minutes.
  2. ₹1,500 to cut women’s shirts more carefully: sewing drops from 15 to 14 minutes, but cutting rises from 2 to 5.

4. Before you test them: which proposal pays back, and how fast?

  • Proposal 1, in about 2 weeks
  • Both, in about 4 weeks
  • Proposal 2, in about 5 weeks; proposal 1 never pays back
  • Neither

Proposal 1 saves time in cutting, which has spare capacity: ΔT = 0, payback never, even though the cost report shows ₹525 a week of “savings”. Proposal 2 frees one sewing minute per women’s shirt: after 120 men’s shirts, the remaining 1,200 minutes make 85 women’s shirts instead of 80. Five more shirts × ₹60 = ₹300 a week, so ₹1,500 pays back in 5 weeks. Cutting rises to 1,625 minutes, still within capacity.

Part E: an inventory profit

5. Another factory makes 6,000 units in a month and sells 4,000. Its indirect costs are ₹90,000 a month, absorbed over units produced. By how much does cost accounting overstate the month’s profit, compared with throughput accounting?

  • ₹90,000
  • ₹30,000
  • ₹60,000
  • Nothing: both show the same profit

₹90,000 ÷ 6,000 = ₹15 of overhead per unit. The 2,000 unsold units carry 2,000 × ₹15 = ₹30,000 of this month’s expense into inventory. Throughput accounting charges the full ₹90,000 this month.

Looking back

You have now seen the whole argument:

  1. Product cost misleads, because fixed expenses don’t vary with the decision, and capacity can’t be matched to demand.
  2. Find the constraint. It decides what the company can earn.
  3. Rank by throughput per constraint unit when a resource is the constraint, by throughput per unit when the market is.
  4. Judge every decision by ΔT, ΔOE and ΔI, at the level of the whole company.
  5. Value inventory at truly variable cost and never allocate shared costs to products or subsystems.
  6. Control cost by growing throughput faster than expense.

Check your understanding

Answer all five. Get four right to complete the course.

1. In the shirt factory, which product should be made first?

  • Women’s shirts: higher margin
  • Women’s shirts: higher price
  • Men’s shirts: ₹5 per sewing minute against ₹4
  • Half of each

Sewing is the constraint.

2. The best weekly result for the shirt factory, before any improvement, is…

  • A profit of ₹300
  • A loss of ₹300
  • A profit of ₹7,687
  • A profit of ₹10,800

₹10,800 of throughput minus ₹10,500 of operating expense.

3. Why does proposal 1 (faster cutting) never pay back?

  • It costs too much
  • Men’s shirts sell for less
  • Cutting becomes the constraint
  • Cutting already has spare time, so the factory can’t sell one more shirt

ΔT = 0 and ΔOE = 0.

4. Proposal 2 adds how much throughput a week?

  • ₹60
  • ₹300
  • ₹1,500
  • Nothing

Five more women’s shirts at ₹60 of throughput each.

5. Which statement sums up throughput accounting?

  • Allocate overhead more accurately
  • Cut costs first, then grow
  • Judge every decision by its effect on the whole company’s throughput, operating expense and investment
  • Keep every resource busy

Products don’t have costs; companies make profits.