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Idea behind theory of constraints (TOC)

The idea behind TOC is that raw materials is the only variable cost. Labour & variable overhead are consider as fixed cost.
The theory of constraints (TOC) describes methods to maximize operating income under bottleneck situation.

The three measurements:
1. Calculate Throughput contribution = sale - direct materials cost of the goods sold.
2. Investments = Sum of materials costs in direct materials, work – in – process, and finished goods inventories; R & D costs; and costs of equipment and buildings.
3. Operating costs equal all costs of operations (other than direct materials) incurred to earn throughput contribution. Operating costs include salaries and wages, rent utilities, and depreciation.

The objective of TOC is to increase throughput contribution while decreasing investments and operating costs. TOC considers a short – run time and assumes that operating costs are fixed costs.

The important concept behind TOC is that the production rate of the entire factory is set at the pace of the bottleneck resource. Hence, in order to achieve the best result TOC emphasises the importance of removing bottlenecks or limiting factor.
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