Theory of Constraints (TOC)
The Theory of Constraints (TOC), describes a method to maximize operating income when faced with some bottleneck and some non bottleneck operations. The Theory of Constraints (TOC), defines three measures, such as,
Provide some possible constraints for a manufacturer.
Some example of possible constraints for a manufacturer. including:
Generally, there are four types of constraints that businesses commonly experience, including
01. Physical: (includes Equipment, Cost, and Labor etc)
02. Policy: (includes Break times, overtime, minimum production line etc)
03. Paradigm: (includes Emotion, practices, beliefs etc)
04. Market: (includes Size of market, Competitors, consumer etc)
What is the major rationale for the use of variable costing?
Ans:
The major rationale for the use of variable costing is to take corporate decision by CPV analysis, where all variable cost are accumulated to achieve variable cost per unit. It also use for internal reporting purposes.
01.Throughput contribution: = (Revenue – Direct material)
02. Investment:
Direct material cost = ****
Work in process = ****
Finished goods inventory = ****
Research & Development cost = ****
Cost of equipment & building = ****
Result creates Total investment =****
03. Operating cost:
All operating cost other tan direct material cost = *****
Salaries &wages=*****
Rent = ****
Utilities = ****
Depreciation = ****
Result total operating cost = *****
The objective of Theory of Constraints (TOC):
The objective of the Theory of Constraints (TOC) is to increase throughput contribution while decreasing investments and operating costs. The objective of the Theory of Constraints (TOC) considers a short runtime horizon and assumes that operating cost is fixed cost.
Balance scorecard:
The Balance scorecard can play a key role in the final step of the five-step decision-making process such,
01. Implementing the decision
02. Evaluating performance
03. Learning
There are four perspectives balanced scorecard is
01. Financial
02. Customers
03. Internal business process and
04. Learning and growth
Let,s start some formula of Theory of Constraints (TOC)
01. Throughput time: =Process time+Inspection time+Move time+queue time
02.The Manufacturing cycle efficiency(MCE)= (Process time/Throughput time)
03. % of time spent of non value added activities = 1-MCE
04.Delivery cycle time=Wait time+Throughput time:
05.The manufacturing cycle efficiency(MCE)(under JIT)=Process time /queue time
Let,s start with Practical Example
Practical Example. (01) (Try yourself) (CMA-January-2022)
The
wimax company LTD interested in cutting the amount of time between when a customer places an order and when the order is completed.for the first quarter of the year 2021 the following data were reported
Formula
Inspection time = 15days
Process time = 28days
Wait time = 16 days
Queue time = 4 days
Move time = 7 days
Requirement:
01. Compute the Throughput time or Velocity of production
02. Compute the manufacturing cycle efficiency(MCE) for the quarter
03.What % of Throughput time was spent in non value added activities
04. If used JIT all queue time can be eliminated in production, what will be the new MCE?