The Cost Accounting based on TOC Throughput Theory considering Productive Fluctuation

Transcription

1 ( 京都学園大学経営学部論集第 23 巻第 号 2013 年 10 月 95 頁 109 頁 ) 95 Article The Cost Accounting based on TOC Throughput Theory considering Productive Fluctuation Sumiyoshi OHTA ABSTRACT TOC throughput theory is very famous for the managerial accounting theory, but it says no to individual levying of the cost and doesn t show the formulas in the cost accounting. So manufactures are often puzzled when they introduce that method practically. In this study, it is examined that the productive fluctuation has various influences on the cost accounting based on TOC throughput theory using the actual data in manufacturing. As a result, it is proposed that the cost accounting in each product is efficient even if TOC throughput accounting theory is applied in case of considering individual levying of the cost appropriately. KEY WORDS: TOC Throughput Theory, Cost Accounting, Productive Fluctuation 1 Introduction The Theory of Constraints (TOC) throughput accounting theory put forth by Dr. Goldratt et al. in the 1980s is especially noteworthy as a methodology that transformed cost accounting up to that time. Nevertheless, many researchers have indicated the following issues. A. No clear formulas are given. As a result, companies are often confused about how exactly to implement the accounting methods in an organization. Takahashi ( 2008), p20

2 96 B. The method of including daily production fluctuations in a manufacturing industry with a high-mixand low-volume production environment is unclear, particularly for small and medium-sized manufacturers (SMM),. This paper attempts to solve issues based on the above observations using the following methods. (1) To solve the issue mentioned in A above, the machine rate, which is a cost accounting methodology, is proposed. This system incorporates principles of cost allocation by product, which is prohibited by TOC throughput accounting. (2) For B above, production fluctuations in the manufacturing industry are divided into internal and external fluctuations, with the former considering the relationship between eliminating bottleneck process by controlling transfer lot sizes and throughput accounting, and the latter considering the relationship between Demand Forecasting error and throughput accounting. Further, this paper uses the actual data of Company Z, a real-life manufacturer of electrical components headquartered in Tottori city. This company has a total capital value of 98 million yen and 55 employees. It is a typical regional SMM, with headquarters and manufacturing locations in rural areas and sales offices in large urban areas such as Tokyo and Osaka. 2 Issues with TOC throughput accounting Table 1 compares the cost accounting methods discussed in this paper with absorption cost basis, a standard cost accounting method and TOC throughput accounting. Throughput accounting is derived from the basic idea that throughput is This paper uses the machine rate along with the production environment of Company Z. Of course, the person rate may also be used depending on each company s circumstances, because the basic concept is the same.

3 The Cost Accounting based on TOC Throughput Theory considering Productive Fluctuation (Ohta) 97 generated from sales, not production (Goldratt et al. 1984), and is an excellent cost accounting methodology that reflects a company s actual activities. It made great changes to previous ideas about cost accounting, for example (1) Unlike absorption cost basis, it reflects sales results in cost accounting. (2) It denies the concept of indirect cost allocation. (3) Using the metric of throughput per bottleneck process unit time, it incorporates the idea production speed to bring about profit. into cost accounting On the other hand, throughput accounting also has issues such as the following: (1) It does not provide clear formulas. Therefore, when implementing throughput accounting in the manufacturing industry, there is often some confusion about accounting methods. (2) There is no concept of individual cost allocation. Consequently, there is no specific way to calculate inventory volume and operating expenses by product. Accordingly, with high-mixand low-volume production, which has become the norm in recent years, there are manufacturers ( particularly regional SMM) who, while agreeing upon the idea of the TOC throughput accounting theory itself, seem confused about how exactly to estimate costs and perform cost accounting, and how these are reflected in a production plan or business strategy. Tomioka ( 2003), p53

4 98 Table 1 A comparison of Asorption cost basis, TOC throughput accounting, and Methodology employed in this study Classification Absorption cost basis TOC throughput accounting Methodology employed in this study Purpose ofaccounting method What were past costs? How to continue generating a profit into thefuture? Same as left. Accounting Classification Financial accounting Managerial accounting Results Made Public For external use For internal use Accounting method OP = SR-PC-GA OP:Operating profit SR:Sales Revenues PC:Productional Costs GA:General and Administrative expenses No clear accounting method GP=SR-PC GP:Gross operating profit SR:Sales Revenues PC:Productional Costs Direct manufacturing costs Yes Yes Yes Material costs Yes Yes ( only some) Yes Outsourcing costs Yes No Yes Direct labor costs Yes No Yes Indirect manufacturing costs Yes No Yes Indirect material costs Yes No Yes Manufacturing expenses Yes No Yes Items included in manufacturing costs Indirect cost allocation by product Merits Demerits ( issues) Individual allocations for all indirectexpenses including general administrative expenses Clear fixed costs by product. Easy comparison with other companies. Profit is calculated without regard to revenues owing to cost accounting by production volume. Calculation of cost allocation for indirect costs by product is very complex. No ( no concept of this) Sales incorporated into cost accounting. Production speed incorporated into cost accounting. No clear idea of correlation with daily production fluctuations. Accounting for inventory levels by product and operating expenses is unclear. Using person or machine pay rate, individual allocation of indirect manufacturing expenses Same as left. Added cost accounting by product for indirect expenses.

5 The Cost Accounting based on TOC Throughput Theory considering Productive Fluctuation (Ohta) 99 3 Cost Allocation by Product Using TOC Throughput Accounting and Machine Rate 3.1 Cost Accounting Using Actual Data from the Manufacturing Industry In this study, we use the machine rate to consider cost accounting by product on the basis of production process of Company Z. Fig. 1 shows the production process flow for one of main products of Company Z. Formula ( 1) is used for cost accounting by product using the machine rate. Bottleneck process Fig.1 Production Processes of the Company Z C i = MT i + OE i = MT i + MCR i C i = MT i +(TCW + TCP) (Tm Nmc) (AT i N i ) (1) C i MT i OE i : Manufacturing cost of Product i ( per unit) : Direct material cost of Product i ( per unit) : Operating expenses of Product i ( per unit) MCR i : Machine rate of Product i (per unit) T i : Assembly time of Product i (per unit) TCW : Total labor costs of factory Fig.2 Joint Portion of Solderless Terminal

6 100 Table 2 The production status of top five products of Company Z Assembly time Total in factory proportion defective Manufacturing cost of 1 Unit Total except Bottleneck process Bottleneck process Machine rate Average machining time per unit number of machines Operating expenses Direct material cost of Product i ( per unit) Ci Ti MCR Tm Nmc OE Mti % Yen second Yen/ second Thousand second Unit million Yen Yen 2.0% item A 1.9% item B 12.4% , item C 7.2% 4.7% item D item E TCP : Total manufacturing expenses for factory T m : Annual operating time for each machine in factory N mc : Total number of machines in factory AT i : Average machining time per unit of Product i for each machine N i : Total number of machines required to produce Product i ( per unit) In these processes, the Bottleneck process is the Brazing process. In this process, gas welding connects the joint of cylindrical portion ( red mark) of the solderless terminal ( Fig. 2). As has been previously explained, TOC throughput accounting denies the concept of cost allocation by individual product. However, it is common for companies to have varying levels of processing difficulty, process time, yield of the product, and ability to use new pro-

7 The Cost Accounting based on TOC Throughput Theory considering Productive Fluctuation (Ohta) 101 duction technology for each product. For example, if a particular product has a high defect rate, scrap costs are wasted and operating expenses increase. Likewise, if a company develops a new production technology that can be used to speed up processing for a particular product, manufacturing time is decreased. In other words, manufacturing costs vary in each case. Table 2 shows the production status of top five products of Company Z. Of these, Product C is the largest. It is also the most difficult to manufacture, with total work time approximately 11 times longer than that of the company s standard products. 3.2 A Simulation of Cost Allocation by Product Using the Machine Rate In order to resolve the aforementioned issues, Company Z is considering implementing new technology in item C s Brazing process, which is a bottleneck. The company has set the following two goals for this new technology. 1. Reduce the proportion defective from 12.4% to 5%. 2. Reduce the per-product cycle time for the bottleneck process from 9.6 s to 3 s. A cost accounting simulation for Product C using the machine rate was performed on the basis of these goals. 3.3 Validation of Results Table 3 shows the results of the comparison simulation for the implementation of the new technology in Brazing process, which is a bottleneck. According to Table 3, the manufacturing cost for each unit of Product C resulted in the following: 1. A lower proportion defective reduced the manufacturing cost from

8 102 Table 3 The cost accounting simulation using the machine rate current condition 1) proportion defective 12.4% 5.0% 2) Assembly time in Bottleneck process Manufacturing cost of 1 Unit Machine rate Operating expenses Assembly time in Bottleneck process proportion defective Manufacturing cost of 1 Unit Machine rate Operating expenses Assembly time in Bottleneck process proportion defective Manufacturing cost of 1 Unit Machine rate Operating expenses Assembly time in Bottleneck process proportion defective Yen Yen/ second million Yen Yen % second Yen/ second million Yen Yen % second Yen/ second million Yen % second item A 2.0% % % item B 1.9% % % v0 item C 12.4% % % item D 7.2% % % item E 4.7% % % yen to 142 yen owing to the reduction in operating expenses and the machine rate. 2. By reducing the cycle time for the bottleneck process, the manufacturing cost was reduced from yen to yen. This shows that the new technology contributed to improvements in operating expenses and throughput production speed for Product C. For the time being, Company Z plans to limit the implementation of this new technology to the difficult-to-manufacture Product C. The need to perform cost accounting that includes operating expense allocation for specific products arises within actual companies. In this case, by using the machine rate, an accurate product cost can be obtained through cost accounting on a per-product basis. In other words, even in TOC throughput accounting, it is worthwhile to perform cost accounting based on per-product cost alloca-

9 The Cost Accounting based on TOC Throughput Theory considering Productive Fluctuation (Ohta) 103 tions by using the machine rate, focusing on operating expenses and cycle times. 4. Production Fluctuations and TOC Throughput Accounting 4.1 Internal Production Fluctuations and TOC Throughput Accounting In general, manufacturers deal with internal production fluctuations caused by various factors such as 1. Production backlogs from the previous day. 2. Work-in-progress (WIP) in bottleneck and other processes. 3. Yield fluctuations due to product defects. 4. Rescheduling necessitated by expedited orders. Of these internal factors, in this paper we will consider bottleneck process and buffer control on the basis of TOC and drum buffer rope (DBR) concepts. In Dr. Goldratt s book The Goal (Goldratt et al. 1984), production processes in DBR are compared to a troop of Boy Scouts hiking in the forest. DBR is a production-planning methodology designed to achieve optimal overall production output by minimizing the WIP (buffers) and maximizing the capacity of bottleneck process through the following: 1. Drum: controlling the pace of production to match the capacity of the bottleneck process or constrained process. 2. Buffer: determining the amounts of WIP or comparable lengths of time such that the bottleneck process is never idle. 3. Rope: controlling the material starts upstream in the process to properly control the WIP in the bottleneck process Buffer Control Using Transfer Lot Size Inserting a buffer prior to a bottleneck process is effective in controlling internal fluctuations in production. However, unlimited buffers can lead

10 104 to waste between steps and an increase in production lead times. Within actual production process in the manufacturing industry, proper control of buffer sizes is absolutely necessary. Fig. 3 presents a general model that shows the impact of buffer lot size changes on production lead times in production process of Company Z. Lot size Production Process 1h Time 2h 3h 4h 5h 3,000 Unit 1,500 Unit Press Brazing Plating Press Brazing Plating A1 A2 A3 A1 A2 A3 A1 A2 A11 A12 A21 A22 A31 A32 A11 A12 A21 A22 A31 A32 A11 A12 A21 A22 A31 A32 A3 Fig.3 Influence on production lead time by the change of the Buffer Lot size According to Figure 3, when manufacturing 9, 000 units of a certain product, even though 3,000 units can be produced at one time in a particular step, production lead times can be reduced from five hours to four by reducing transfer lot sizes for the next step by one half to 1, 500 (by sending 1,500 of the WIP to the next step, as it completes the current step) In this case, we validate the results by calculating the profit for one product per unit time on the basis of the processing time in the bottleneck process, as shown in Formula (2) below.. NP=TP BNn FC =TP P LTbn FC (2) NP TP : Profit per unit of product per unit of time (in yen) : Throughput per unit of product (in yen) Single unit flow uses this methodology to the maximum extent possible.

11 The Cost Accounting based on TOC Throughput Theory considering Productive Fluctuation (Ohta) 105 BNn : number of Production units per unit of time in a bottleneck process FC : Fixed costs per unit of time (only for labor costs) P : number of Produced units LTbn : Production lead time in the bottleneck process (in min) Validation of the Results Table 4 shows the assumptions and results of Company Z s case, given the above. By changing the transfer lot size from 3,000 to 1,500 units, the profit for one unit of product per unit of time increases from 332 yen to 402 yen. Further, in this case, BNn is the bottleneck s productivity, and is thus the constraint that decides the entire factory s productivity. Table 4 A precondition and inspection result sign Contents the transfer lot size 3,000 Unit 1,500 Unit NP Profit per unit of product per unit of time Yen TP Throughput per unit of product Yen 70 P number of Produced units Unit 12,000 LTbn Production lead time in the bottleneck process hour BNn number of Production units per unit of time in a bottleneck process Unit 5 6 FC Fixed costs per unit of time (only for labor costs) Yen External Fluctuations and TOC Throughput Accounting Production Fluctuations Due to Demand Forecasting Error and Throughput Accounting Unfortunately, there are no real-world examples of a Demand Forecasting being 100% accurate within the manufacturing industry. Fig. 4 shows the variation in Demand Forecasting accuracy for the period November 2010 to April 2011 for top twenty revenue-generating products

12 106 of Company Z. When the Demand Forecasting was off during this period, it showed a pattern of forecasts greater than actual demand or forecasts less than actual demand. The first forecast causes relatively greater damage to manufacturers, and in Company Z s case, it accounts for 17.5% of the time overall. This led to excess inventory and excess production capacity owing to the adjustments made to the workload. These kinds of Demand Forecasting errors impact the calculations of direct material costs, operating expenses, and inventory in throughput accounting. In cases where the forecast exceeds actual demand, direct materials costs for excess production and operating expenses for excess production are both wasted. This has an impact on inventory levels at the end of reporting periods when excess inventory is generated. The following metrics can be (2) Forecast Actual (1) Forecast actual 17.5% Fig.4 2σ 100% 2σ Forecast accuracy variation of Company Z Forecasted values that exceed actual demand lead to excess inventory and excess capacity owing to workload adjustments. On the other hand, when forecasted values are less than actual demand, manufacturers can expect stock shortages and loss of trading confidence. At first glance, the latter may appear to be more damaging. However, if the forecast isn t wildly incorrect, manufacturers can generally respond by increasing labor hours or increasing production capacity. The former is often due to the external environment, such as market factors, and it can be difficult to quickly find effective ways to resolve the matter by the manufacturer s ability to adjust production alone.

13 used to assess the impact of Demand Forecasting error on throughput. accounting The Cost Accounting based on TOC Throughput Theory considering Productive Fluctuation (Ohta) 107 TP/I : throughput per material used (i.e., the production speed) TP/OE: throughput per operating expenses (i. e., organizational and operational efficiency) Validation of Results Fig. 5 shows the results of our comparison simulation for TP/I and TP/OEwhen Demand Forecasting accuracy is 85%, 95%, and 100%. Along with improvements in Demand Forecasting accuracy for all five top revenue-generating products, both TP/I and TP/OEimproved. This shows that production fluctuations due to the external factor of Demand Forecasting impact production speed and operational and organizational accuracy85% accuracy95% accuracy100% Fig.5 item item item item TP/I TP/OE The comparison simulation for Demand Forecasting accuracy Tomioka et al ( 2003), p79-82

14 108 efficiency in throughput accounting. Furthermore, in actual corporations Demand Forecasting, estimates and forecast accuracy will vary for each product. As a result, from this standpoint, cost accounting on a per-product basis in throughput accounting does have value. 5 Conclusion This study posited the implementation of TOCthroughput accounting in an actual small- or medium-sized company. The study used actual data from the regionally based company and proposed a cost-accounting methodology that incorporates elements of individual cost allocation by product, which has been an issue to date. In addition, this study conducted a simulation for comparison purposes by using the machine rate to examine the changes to throughput and individual cost for each product. The simulation s results were then validated. Furthermore, the research focused on various production fluctuations (both internal and external ) within the manufacturing industry, and considered the impact of these fluctuations on TOCthroughput accounting. TOCthroughput accounting is an excellent theory that shows a company s actual situation. In today s age of high-mix and low-volume production, companies should consider it as a cost accounting methodology adapted to a company s actual situation. REFERENCE [ 1] Takahasi. M The Development of Throughput Accounting, YOKOHAMA BUSINESS REVIEW vol.28 No.3 4, 2008 [ 2] Tomioka. M. and Kurihara H. Practical throughput accounting, Japan Management Association Management Center, 2003 [ 3] Goldrattt, Eliyabu M. and Jeff Cox. The Goal, Translated by Sanbongi T. The Goal : What is the Ulitimate Objective of Business Enterprises? Daiamond-sha, 2001

15 The Cost Accounting based on TOC Throughput Theory considering Productive Fluctuation (Ohta) 109 [ 4] Goldrattt, Eliyabu M. Translated by Sanbongi T. Change the Rules : We Should Be Able to Make a Profit, So Why Can t We? Daiamond-sha, 2002 [ 5] Miwa, T. CIA Part Ⅲ, Business Analysis and information Technology. US Education Netwark, 2006 [ 6] Asadai, K., Iwasaki, T., Aoyama, Y. Introduction to Demand Forecasting for Inventory Management, Toyokeizai Shonpo-sha, 2005 [ 7] Kubota, C. Genkai rieki bunseki ni toru kakaku kettei senryaku (Price Setting Strategies using Marginal Profit Analysis), Doyukan,2010 [ 8] Katsuro, T. How to Think about and Seek Appropriate Inventories, Nikkan Kogyo Shinbun-sya, 2003 [ 9] Komura, T., Fukushima,K., Kiuchi,M. Production/ Salas System for Maximization of Profits-Make-to-order system or Make-to-stock system, Journal of Japan Industrial Management Association, Vol.58, No.3, pp , 2007 [ 10] Komura, T., Huang, Hai, Iijima, M., Fukushima, K., Kiuchi, M. Method of adjusting production, inventory,and backlog orders to cope with demand fluctuation. Journal of Japan Industrial Management Association, Vol.61, No.2, pp32-45, 2010 [ 11] Madate, M., Reexamining How to Reduce Cost in Each Industry. Kanki Shuppan, Ltd, 2006 [ 12] Mizuyama, H., Towards Supporting Management Decisions through Predicted Markets. Journal of Japan Industrial Management Association, Vol.20, No.5, pp , 2010 [ 13] Nagatomi, Y., How to Read Economic Indexes. Zaikei Shoho-sya, Ltd, 1999 [ 14] Shimaguchi, M., Wada, M., Ikeo, K., Yoda, T. Business School Text Marketing Strategy. Yuhikaku,Ltd, 2004 [ 15] Horiguchi, T. Moukaru Koujo no Shikumi (Profitable Factory Structures), Nikkan Kougyou Shinbunsha, 2010 [ 16] Takahashi, K., Analysis of the Traits of the Production Support System for Demand Series with Trend Fluctuations, Journal of Japan Industrial Management Association, Vol.44, No.1, pp64-70, 1992 [ 17] Horiuchi, T., Jissen! Genka Kanri (Cost Control in Practice),Shuwa System, 2011