Limiting Factors in a Business Situation

Limiting Factors in a Business Situation(a) Explain what a control actor is and what sort of things can set out close calculates in a business situation?(16 marks)Limiting factor is any factor that restricts a company or an compositions activities. In other speech, restricting factor is a factor which is limited or not enough provide to the company. Limiting factors in an organisation can be labour minute of arcs, young material, mould hours or space. For example, when gross revenue demand excess the carrefourivity capacity, the company do not have enough resources to let on the products, the scarce resource willing be the factor that restricts the companys activities. Hence, the scarce resources should be identified to ensure company has enough resources to produce their products as many as their wish. By using bound factor, we can maximise the profit when obtained the superlative possible contri plainlyion to profit all(prenominal) time. display case1ABC role per building block of outputRM 24RM 20RM 12Machine hours needed per unit of output6 hours2 hours1 hoursEstimated sales demand3,000 units3,000 units3,000 unitsRequired mechanism hours18,000 hours6,000 hours3,000 hoursThe machine hour is limited to 18,000 hours for the period beca work of the breakdown of one machine.Consider Example 1.From the example 1, we know that the company required check 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 beca subprogram of the breakdown of one machine. In this situation, companys activities be limited by the machine hours. When we looking at the above information, we will think that the company should produce the product A first since the contribution per unit of product A is the highest, but this could be wrong. This is beca office produce each unit of product A required 6 machine hours, but product B required 2 machine hours a nd product C required 1 machine hours only. So, the company can produce 3,000 units of product B and C respectively first, after that just produce the product A with the remaining machine hours. In other words, if the company concentrates on produce the product A, there will no machine hours go away to the company to produce B and C. In order to maximize the companys profit, we should use limiting factor to engineer the superior possible contribution per profit for each product and rank the profitability of the product to obtain the optimum achievement plan.(b) Explain the techniques that have been developed to assist in business decision- do when whizz or multiple limiting factors argon encountered(16 marks)Single limiting factor- Limiting factor analysisWhen single limiting factor are encountered, we have to use limiting factor analysis to admirer companies to identify the scarce resources and maximise profit by using the best combination of available resources. In limiti ng factor analysis, we should identify the tightness resources first. Secondly, we should calculate the contribution per unit for each product. Next, we can calculate the contribution per unit of the bottleneck resource for each product after we get the contribution per unit of each product. After this, we can rank the products from the highest to the lowest in sequence based on contribution per unit of bottleneck resource. Finally, we can allocate the resources from the highest contribution per profit to the lowest contribution per profit by the ranking until the resources are used up. By doing so, we can obtained the greatest possible profit when resources are limited by single limiting factor.Example 2XYMachine hours per units3 hours4 hours gross sales demand2,000 units3000 unitsRMRMSelling price3250Less Direct Material1020Direct Labour58 changeable Overhead582036Contribution1214The supply of materials for the period is unlimited, but the machine hours are limited to 15,000 hour s.In order to maximize the profit, we should using limiting factor analysis to crystalize the problem when there is only one limiting factor. shade 1 discern 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. shade 2 Calculate the contribution per unit for each product.The contribution has been given at the above.XYContribution per unitRM 12RM 14 dance step 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.Production should be concentrated on product X first, up to maximum sales available, then product Y.Step 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 followsRMProduct 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 one of scare resources which restricts organisations activities, we can use linear programming to solve the problem. Firstly, we must define the variances when using linear programming. Then, we can define and formulate the objective. After formulate the objective, we also must formulate the constraints. Next, draw a chart to identify the feasible region and get the optimum production plan from the graph. 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 kilos supreme 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 variancesLet 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 r equired 4 kilos and product B required 8 kilos.So, total kilos required = 4 x + 8 yConstraintsUtilisedAvailableMachine 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 graph is shown as belowThe original constraints were Step 5 Determine the optimal solutionCalculate the total contribution at each point P, Q and RPoint 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 maximum con tribution.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 byput accounting. State and justify your mind on whether or not throughput accounting and limiting factors are the same thing.(18 marks)For every company to reduce it costs and improve the profitability of the company, managers will use cost accounting to help them on decision-making. Hence, Theory of constraints (TOC) or Throughput accounting (TA) is another method for decision-making apart from Standard Based cost, Activity Based Costing and Marginal Costing. TOC/TA is a new management accounting approach based on factors identification when the constraints are restricts companies to achieving their goals and reduces companys profits.Throughput accounting is used when there are few constraints only, usually just one. The constraint can be a resource, company policy or managemen t mindset. According to Goldratts ideas, TOC is forecasting on a limit capacity at certain critical points in any production plan. Therefore, TOC maximise organisations profit by increasing the producing speed through an organisation in order to eliminating bottlenecks.Additionally, throughput accounting is not costing because it does not include shifting and fixed expenses, and overheads to products. 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 of money that a company produced, throughput is total sales (S) less total varying costs (TVC), usually is cost of raw materials ( T = S TVC ). However, T exists even there is only one product are sold. Besides, finished goods of stock-take in a warehouse that not yet sold are not included.Investment (I) is total amount of money that invest in a new system to enhance its ability to improve the capacity, for examples machinery.Operating expenses (OE) is all others expenses except the total variables cost when calculate the throughput. Basically, OE is total costs to operating the production system, for examples maintenance, utilities, rental, etc. Fixed or partially fixed costs are no difference in throughput accounting. On the contrary, there have either total variable cost or operating expenses in throughput accounting.Therefore, 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 investment(ROI) = Net profit / Investment = NP/I productivity(P) = Throughput / Operating expense = T/OEInvestment turns(IT) = Throughput / Investment = T/IAccording to Dr. Goldratt, we can use the above formulas to get the right decision when making a decision that related to changes in revenue, expenses or investments, which must ge t a positive answer from one out of three questions belowDoes it emergence throughput?Does it reduce operating expense?Does it improve the return on investment?Finally, there are five steps established by Goldratts in the TOC to help managers maximize the throughput and then achieve organisations goals. The five steps are as followsIdentify the system constraints. There is either an internal constraint (in production, engineering or planning.) or an external constraint (in the market)? The constraint is a resource or a policy?Decide how to maximise the output from the constraint. All other activities are prepared subject to this decision. Non-constraints must be subject to constraints.Consider the appropriate level of resources once the resource constraint has been identified. Therefore, the capacity constraints can be improved.compound the systems constraints.Once constraint has been corrected, return to Step 1 to determine the next most serious constraints and duplicate the above steps.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 identify bottleneck resources instead to maximise companies profits.However, throughput accounting is used when there are few constraints normally just one but limiting factor is used when there are one or more than one constraints. Besides, limiting factor is focus on working to obtain greatest contributions while throughput accounting is focus on some critical areas that have limited capacity at 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 sale s price minus total variable costs. Variable costs or in other words cost of materials in throughout accounting included direct material costs only, labour and overhead costs are fixed and categories to total pulverization costs. In contrast, limiting factor calculates contribution as sales price minus variable costs but labour and overhead costs are part of variable costs in limiting factor, this is difference from throughput accounting.