Explain and describe what a limiting factor is

Explain and describe what a constrictive factor isLimiting factor is either factor that restricts a comp each or an organisations activities. In simple words, a limiting factor is the factor which is limited or not freely ready(prenominal) to the company. Limiting factors in an organisation goat be labour time, raw material, weapon hours or space. For example, when sales demand excess the convergenceivity capacity, the company do not have enough preferences to produce the harvest, the scarce resource will be the factor that restricts the companys activities. The production constraints can be removing and additional resources can be acquired when the scarce resources be existed. Hence, the scarce resources should be identified to make sure the company has enough resources to produce their products as many as their wish. By utilise limiting factor, we can maximize the profit when obtained the greatest possible office to profit each(prenominal) time.Example1ABCContribution p er building block of outfitRM 24RM 20RM 12 shape hours ask per unit of output6 hours2 hours1 hoursEstimated sales demand3,000 units3,000 units3,000 unitsRequired forge hours18,000 hours6,000 hours3,000 hoursThe machine hour is limited to 18,000 hours for the period beca use of the breakdown of one machine.Consider Example 1.From the example 1, we know that the company required come in 27,000 machine hours to produce the total sales demand of the product A, B and C that they estimated. However, the company only has 18,000 machine hours for the period because of the breakdown of one machine. In this situation, companys activities be limited in the in stock(predicate) of machine hours. When we looking at the available information, we will think that the company should produce the product A first since the theatrical role per profit for product A is the highest but this assumption can be wrong. This is because produce a product A required 6 machine hours, whereas product B requi red 2 machine hours and product C required 1 machine hours only. The company can concentrates on producing 3,000 units of product B and C respectively and inactive have machine hours left to produce product A. In another(prenominal) words, if the company only concentrates on produce the product A, on that betoken will no machine hours left to the company to produce B and C. In order to maximize the companys profit, we should use limiting factor to calculate the greatest possible contribution per profit for each product and rank profitability of the product to obtain the optimum production plan.(b) Explain the techniques that have been developed to assist in furrow decision- making when single or multiple limiting factors are encountered(16 marks)Single limiting factor- Limiting factor analysisWhen single limiting factor are encountered, we have to use limiting factor analysis to help companies to identify the scarce resources and maximize profit by exploitation the best combin ation of available resource. In limiting factor analysis, we should identify the constriction resources first. Secondly, we should calculate the contribution per unit for each product. Next, we should calculate the contribution per unit of the bottleneck resource for each product. After we get the contribution per unit of bottleneck resource, we can rank the products of the contribution per unit of bottleneck resource. Finally, we can allocate the resources from the highest contribution per profit to the last(a) contribution per profit by the ranking. By doing so, we can obtained the greatest possible profit when resources are limited by single limiting factor.Example 2XYMachine hours per units3 hours4 hoursSales demand2,000 units3000 unitsRMRMSelling price3250Less Direct Material1020Direct Labour58 variant Overhead582036Contribution1214The release of materials for the period is unlimited, but the machine hours are limited to 15,000 hours.In order to maximize the profit, we should using limiting factor analysis to solve the problem when thither is only one limiting factor.Step 1 Identify the bottleneck resource.At sales demand levelSales demandMachine hours per unitTotal machine hoursX2,000 units3 hours6,000 hoursY3,000 units4 hours12,000 hours18,000 hoursThus, machine hours are the limiting factor.Step 2 Calculate the contribution per unit for each product.The contribution has been habituated at the above.XYContribution per unitRM 12RM 14Step 3 Calculate the contribution per unit of the bottleneck resource for each product.To calculate the contribution per unit of the bottleneck resource for each product, the formulae isContribution per units of the machine hours =ContributionMachine hoursProduct X =RM 123 hours=RM 4.00Product Y =RM 144 hours=RM 3.50Step 4 Rank the products from the highest contribution per machine hour to lowest contribution per machine hour. payoff should be concentrated on product X first, up to maximum sales available, then product Y.S tep 5 Finally, allocate the available resources using that ranking that we decided at step 4 and calculate the maximum contribution.Production planUnits producedMachine hours per unitTotal machine hoursBalance of machine hours15,000 hoursProduct X2,000 units3 hours6,000 hours9,000 hoursProduct Y2,250 units4 hours9,000 hoursSo, the maximum contribution is as followRMProduct X ( 2,000 units x RM 12)24,000Product Y (2,250 units x RM 14)31,50055,500Multiple limiting factors- Linear programmingWe can use limiting factor analysis when there is one limiting factor. However, when there is more than than one of scare resources which restricts organisations activities, we can use linear programming to solve the problem. Firstly, we must defined the variances when we using linear programming. After this, we can define and produce the objective. Thirdly, we can formulate the constraints to formulating the problem. Next, we must draw a chart to identify the feasible region and we can get the optimum production plan from the graphical record. Finally, we can solve the problem and get the maximum contribution by doing so.Example 3ABContribution per unitRM 20RM 10Machine hours per unit6 hours3 hoursKilos per unit4 kilos8 kilosMaximum available Machine hours= 18,000 hoursKilos= 24,000 kilosWhat should be the production plan?To answer the example 3, we should use linear programming to get the optimum production plan because there is two or more of scarce resources.Step 1 Define the variances permit x = the number of units of the product A.y = the number of units of the product B.Step 2 Define and formulate the objective function.The objective is to maximize the contribution C, given byMaximum contribution = 20 x + 10 yStep 3 formulate the constraints.The limitations here are machine hours and kilos.For the machine hours, product A required 6 hours and product B required 3 hours machine hours.So, total machine hours required = 6 x + 3 yFor the kilos, product A required 4 kilo s and product B required 8 kilos.So, total kilos required = 4 x + 8 yConstraints utiliseAvailableMachine hours6 x + 3 y18,000Kilos4 x + 8 y24,000Step 4 Draw a graph and identify a feasible region.For the equation 6 x + 3 y = 18,000 machine hoursWhen x = 0, y = 18,000/ 3 = 6,000When y = 0, x = 18,000/ 6 = 3,000Draw a straight line between the point (0, 6000) and (3000, 0) on the graph to represent the line for machine hours constraint.For the equation 4 x + 8 y = 24,000 kilosWhen x = 0, y = 24,000/ 8 = 3,000When y = 0, x = 24,000/ 4 = 6,000Draw a straight line between the point (0, 3000) and (6000, 0) on the graph to represent the line for kilos constraint.The constraints can be show as belowThe original constraints were Step 5 Determine the optimal solutionCalculate the contribution earned at each point P, Q and R draw a bead on P= RM 20 (0) + RM 10 (3,000)= RM 30,000Point Q= RM 20 (2,000) + RM10 (2,000)= RM 60,000Point R= RM 20 (1,500) + RM10 (0)= RM 30,000Point Q gives the maxim um contribution.Step 6 Answer the questionThe optimal point is at x = 2,000 and y = 2,000. This gives a maximum contribution ofC = (20 x 2,000) + (10 x 2,000) = RM60, 000(c) Explain the management idea known as throughput accounting. State and justify your opinion on whether or not throughput accounting and limiting factors are the same thing.(18 marks)To reduce companys cost and improves the profitability, every companys managers are using cost accounting to help them on decision-making. Theory of constraints (TOC) or Throughput accounting (TA) is another order for decision making others than Standard Based Costing, Activity Based Costing and Marginal Costing. TOC/TA is new management accounting approach based on factors identification when constraints are restricts companies to achieving their finiss and hence reduces companys profits.Throughput accounting is used when there are only few constraints, normally just one. The constraint can be a resource, company policy or manageme nt mindset. According to Goldratts ideas, TOC is forecasting on a limit capacity at certain critical points in any production plan. TOC can tap organisations profit by increases the speed of producing through an organisation to eliminating bottlenecks.Additionally, throughput accounting is not costing because it does not allocate all expenses (variable and frigid expenses, including command processing overhead times) to the products and services. Thus, throughput accounting helps managers to get better management decision in order to improve organisations profits by three measurements. They areThroughput (T) is the rate that company produces goal units. When the goal units are money, throughput is net sales (S) less total variable be (TVC), usually is cost of raw materials ( T = S TVC ). However, T exists when there is only one product or service sold. Besides, finished goods of inventory in a warehouse are not count because it has not except sold. operational expenses (OE) i s all others expenses except the total variables cost that used to calculate the throughput. Basically, OE is total cost to operating the production system. Fixed or partially touch on costs no difference in throughput accounting. On the contrary, there only have either total variable cost or operating expenses in throughput accounting. Examples for OE include maintenance, utilities, rental, etc. enthronization (I) is total amount of money that invest in a new system to enhance its ability to improve the capacity, for examples machinery, inventory, building, and other assets and liabilities. in that respectfore, throughput accounting use difference formulas to make difference types of accounting decisions by combined the throughput, total variable costs and operating expensesNet profit(NP) = Throughput Operating Expense = T-OEReturn on investiture(ROI) = Net profit / Investment = NP/IProductivity(P) = Throughput / Operating expense = T/OEInvestment turns(IT) = Throughput / Invest ment = T/IWe can use the above formulas when making a decision that related to changes in revenue, expenses or investments to get the right decision, which must start out a positive answer from one out of three questions belowDoes it increase throughput?Does it reduce operating expense?Does it improve the return on investment?Finally, there are five steps in the TOC to help managers maximize the throughput which causes them to achieve organisations goals. The five steps are as followsIdentify the system constraints. There is an internal constraint? For example, in production, engineering or planning. There is an external constraint? For example, in the market. The constraints a resource or a policy? specify how to maximise the output from the constraint. Prepare all other activities subject to this decision. While Non-constraints need to be subject to constraints.Consider the appropriate level of resources once the resource constraint has been identified. Therefore, the capacity co nstraints can be improved.Enhance the systems constraints.Once the constraint has been corrected, return to Step 1 to determine the next most serious constraints and duplication.In my opinion, throughput accounting and limiting factor is not the same thing but there are similarities and differences in between throughput accounting and limiting factor. For example, throughput accounting and limiting factor are using to assist companies to identify bottleneck resources instead to maximize companies profits.However, throughput accounting is used when there are very few constraints a lot just one but limiting factor is used when there are one or more than one constraints. Besides, limiting factor is reduce on working to obtain greatest contributions while throughput accounting is focus on the premise that the limited capacity in some critical point of any production plan.In addition, limiting factor maximise the organisations profit by using the best combination of available resources but throughput accounting is maximise the profit by increase the producing speed through organisation to eliminate bottlenecks. Throughput accounting calculates the products throughput as the selling price minus all variable costs. Variable costs or in another words cost of materials in throughout accounting included direct material costs only, labour and overhead costs are fixed and categories to total factory costs. In contrast, limiting factor calculated by sales price minus variable costs to get the contribution but variable costs in limiting factor are including the labour and overhead costs, this is difference from throughput accounting.