When adding a new product that requires use of the constrained resource, manage- ment may be startled to find that profits actually decline as a result of the introduction, because the new product eliminated an old product that yielded more throughput per minute. The traditional cost accounting system will not spot this problem, because it focuses on the profitability of a product, rather than the amount of the constrained resource needed to produce it.
Exhibit 5.23 The Increased Constraint Staffing Decision
Product Name
Throughput
$$/min. of Constraint
Required Constraint Usage (min.)
Units of Scheduled Production
Constraint Utilization (minutes)
Throughput per Product
1. 1900Color television $8.11 4 500/500 2,000 $16,220
2. 3200LCD television 7.50 6 350/350 2,100 15,750
3. 5000High-definition TV 6.21 10 150/150 1,500 9,315
4. 4200Plasma television 5.00 12 266/400 3,192 15,960
Total planned constraint time 8,792 — Maximum constraint time 8,800 — Throughput total $57,245 Operating expense total 52,100
Profit $5,145
Profit percentage 9.0%
Investment $320,000
Return on investment* 19.3%
*Annualized.
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Exhibit 5.24 Comparison of Old and New Television Models 3200LCD Television (New)
3200 LCD Television (Old)
Price $400 $400
Totally variable costs $340 $355
Throughput $60 $45
Overhead allocation $35 $35
Profit $25 $10
Required constraint usage 10 minutes 6 minutes
Throughput per minute of constraint $6.00 $7.50
Exhibit 5.25 The New Product Addition Decision (Lower Cost)
Product Name
Throughput
$$/min. of Constraint
Required Constraint Usage (min.)
Units of Scheduled Production
Constraint Utilization (minutes)
Throughput per Product 1. 1900Color television $8.11 4 500/500 2,000 $16,220 2. 5000High-definition TV 6.21 10 150/150 1,500 9,315 3. 3200LCD television(new) 6.00 10 350/350 3,500 21,000
4. 4200Plasma television 5.00 12 83/400 996 4,980
Total planned constraint time 7,996 — Maximum constraint time 8,000 — Throughput total $51,515 Operating expense total 47,900
Profit $3,615
Profit percentage 8.0%
Investment $320,000
Return on investment* 13.6%
*Annualized.
For example, the company’s engineers have designed a new, lower-cost 3200 LCD television to replace the existing model. The two products are compared in Exhibit 5.24.
The traditional accountant would review this comparative exhibit and conclude that the new model is clearly better, since it costs less to build, resulting in a profit $15 greater than the old model. However, the new model achieves less throughput per minute, because its larger throughput is being spread over a substantial increase in the required amount of time on the constrained resource. By replacing the old model with the new model, we arrive at the results shown in Exhibit 5.25.
The model shows that profits have declined by $570, because the new model has used up so much constraint time that the company is no longer able to produce as many of the 4200 plasma televisions. Furthermore, the throughput per minute on the new product has declined so much that it is now ranked as the third most profitable product, Exhibit 5.26 The New Product Addition Decision (Higher Throughput/Minute)
Product Name
Throughput
$$/min. of Constraint
Required Constraint Usage (min.)
Units of Scheduled Production
Constraint Utilization (minutes)
Throughput per Product
1. 1900Color television $8.11 4 500/500 2,000 $16,220
2. 3200LCD television(new) 8.00 5 350/350 1,750 14,000
3. 5000High-definition TV 6.21 10 150/150 1,500 9,315
4. 4200Plasma television 5.00 12 229/400 2,748 13,740
Total planned constraint time 7,998 — Maximum constraint time 8,000 — Throughput total $53,275 Operating expense total 47,900
Profit $5,375
Profit percentage 10.1%
Investment $320,000
Return on investment* 20.2%
*Annualized.
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instead of occupying the new number-two position, as was the case for its predecessor product.
Let us now modify the analysis so that the company’s product engineers have spent their time reducing the required amount of constraint time for the 3200 LCD television, rather than in reducing its cost. In fact, let us assume that theyincrease the product’s cost by $5 whilereducing the amount of required constraint time from six minutes to five minutes, which increases its throughput per minute to
$8.00. The result is shown in Exhibit 5.26, where the company’s total throughput has increased because more time is now available at the constrained resource for additional production of the plasma television. However, this new product intro- duction would almost certainly have been canceled by the accountants because the cost per unit would have increased.
Chapter 6
Payroll Decisions
The payroll function has traditionally been highly labor-intensive, but available technology now makes it possible to automate almost every aspect of the process, leaving the payroll staff with only an oversight role, reviewing transactions for errors.
To see how simplification can be achieved, it is easiest to first break down the payroll function into three categories: inputs, processing, and outputs. In the inputs category, the payroll staff is usually burdened with manual rekeying of employee timecards, which can now be eliminated through the use of computerized time clocks, Web-based timekeeping systems, and data entry by phone. In the processing category, the payroll staff usually spends its time processing payroll deductions, issuing and receiving forms, and calculating payments. These tasks can now be automated with self-service portals, deduction management, and the outsourcing of payroll processing. The final category is outputs, or payments to employees, where the payroll staff traditionally creates and distributes checks.
Instead, it is now possible not only to pay employees by several electronic methods, but also to post their remittance information on the Internet, rather than mailing it to them.
This chapter clarifies how all of these payroll simplification techniques work. The following table itemizes the section number in which the answers to each question can be found:
Section Decision
6-1 How can I automate time clock data collection?
6-2 How do I collect time information by telephone?
6-3 How can I simplify payroll deductions?
6-4 How do employees enter their own payroll changes?
6-5 How do I automate payroll form distribution?
6-6 Should I pay employees via direct deposit?
6-7 How do paycards compare with payments by direct deposit?
6-8 What issues should I consider when setting up a paycard program?
6-9 How do I make electronic child support payments?
6-10 How do I automate payroll remittances?
6-11 Should I outsource payroll?
6-12 Can I outsource employment verifications?
6-13 Can I outsource benefits administration?
6-14 How many payroll cycles should I have?
6-15 How can I reduce the number of employee payroll–related inquiries?
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