Page 3 - CIMA MCS Workbook November 2018 - Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

TASK 2 ‐ THEORY OF CONSTRAINTS AND THROUGHPUT ACCOUNTING

To: David Guy

From: Finance manager
Date: Today
Subject: Theory of constraints and throughput accounting

Theory of constraints

The theory of constraints (TOC) is a way of dealing with production bottlenecks. It applies to
processes that are sequential, i.e. where a sequence of events has to occur in a particular order in
order to make a product or perform a service.

This is the case for our production lines, where each step has to be done in a particular order and
the sequence of production steps can’t be rearranged.

A bottleneck is where one of the steps in the process has a lower capacity than the ideal, meaning
that overall production is limited by this process and the business can’t produce as much as it
needs to. This appears to be what happened to TigerFizz. Carbonisation is a key step in the
production process for carbonated soft drinks and mixers.

When a bottleneck occurs, the production steps that come before the bottleneck are able to work
to full capacity but the bottleneck process isn’t able to deal with the work in progress coming
through, so if the factory tries to carry on as before, work in progress will build up at the
bottleneck process but won’t be worked on.

Any processes after the bottleneck will be underutilised, as there won’t be as much work in
progress coming through the bottleneck for the later processes to work on. This will mean some
idle time for machines and labour on those later processes.

Procedures to follow

The first step of the TOC is to identify the bottleneck. This will be the machine or process that
has broken down and is working under ideal capacity levels. There could be a bottleneck even if a
machine hasn’t obviously broken down. If there is somewhere in the factory where work in
progress is building up, it could be a bottleneck.

It’s worth noting that something is only a bottleneck if overall production is being compromised
and we are not able to produce to customer demand levels.

The TOC then takes two approaches, a long‐term and a short‐term approach.

The second and third steps of the TOC deal with the short‐term approach, i.e. what to do while
the bottleneck is still in place.

The second step says to exploit the bottleneck. This simply means that the best possible use
must be made of the bottleneck process.

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