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Idea of 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 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 relating to TOC are:
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.
Procedure of TOC (Theory of Constraints)
Step-1
Find the total requirement of resources i.e. S of units ´ resource required per unit. Compute it for each department separately.
Step-2:
Throughput accounting Ratio (TA ratio) = (Capacity required¸capacity available)´100 for each department. (noting mention go by normal capacity)
Step-3:
The highest among the TA ratio will be considered as the bottleneck factor. So the problem is now converted into many product none limiting factor situation follow the procedure of case III now.
Find the total requirement of resources i.e. S of units ´ resource required per unit. Compute it for each department separately.
Step-2:
Throughput accounting Ratio (TA ratio) = (Capacity required¸capacity available)´100 for each department. (noting mention go by normal capacity)
Step-3:
The highest among the TA ratio will be considered as the bottleneck factor. So the problem is now converted into many product none limiting factor situation follow the procedure of case III now.
