1-2.2. Managing Constraints

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Del curso dictado por University of Illinois at Urbana-Champaign

Accounting for Business Decision Making: Strategy Assessment and Control

32 calificaciones

University of Illinois at Urbana-Champaign

Accounting for Business Decision Making: Strategy Assessment and Control

32 calificaciones

Curso 4 de 5 en SpecializationFundamentals of Accounting

Accounting information is the lifeblood of the organization, as it facilitates and influences operational and strategic decisions intended to achieve organizational goals. Organizations benefit from three decision-oriented roles of accounting: measurement, control, and communication. This course provides an introduction to accounting’s role in helping managers develop and implement, and improve the organization’s strategy. In particular, you will learn how non-financial and financial information is created, organized, and communicated to help managers make strategic decisions, as well as measure strategic success. This course also provides an introduction to accounting as a control function inside the organization, which helps influence the alignment of managers’ and employees’ decisions with organizational goals. You will learn about different types of controls, including process controls, budgets, and performance measurement and evaluation tools and techniques. Upon successful completion of this course, you will be able to: • Create and communicate accounting information that facilitates strategic decisions. • Use accounting information to develop, implement, and improve organizational strategy. • Implement controls that align managers’ and employees’ decisions with organizational goals. • Measure and evaluate manager and employee performance to control and motivate operational and strategic decision-making. If you enjoy this business course and are interested in an MBA, consider applying to the iMBA, a flexible, fully-accredited online MBA at an incredibly competitive price offered by the University of Illinois. For more information, please see the Resource page in this course and onlinemba.illinois.edu.

De la lección

Module 1: Managing Capacity

In this module, you will explore different measures of an organization's capacity and understand their implications for many different decisions, including product pricing.

1-2.1. Identifying Constraints4:14

1-2.2. Managing Constraints5:15

1-2.3. Application and Extension5:34

1-2.4. What We’ve Learned10:50

Conoce a los instructores

Gary Hecht, Ph.D.
Associate Professor of Accountancy
Department of Accountancy, College of Business

Now let's talk about some additional concepts.

First of all, let's focus on time horizon, as that matters quite a bit.

Now you may be wondering during the conversation,

why not just alleviate the constraint?

Why not go out and hire more employees?

Or why not buy more machines or increase our distribution channel?

And in the long term those options are quite feasible.

But the focus of our discussion is more about the intermediate or short term.

And making the most of the capacity that we have currently.

The solutions between these two different time horizons, often are quite different.

And we are focusing on the latter.

Making the most of the capacity that we currently have.

So in doing that, we are often assuming that capacity costs are fixed for

a given amount of time.

We're not expanding or even decreasing our capacity in a lot of our conversation and

our discussion.

And short of the long-term,

what we're going to do is use measurement to help us to manage these constraints.

Let's talk about this issue further.

In terms of our measurement, let's go back to that first example,

the one where we had two products, $3 in contribution margin for product A, and

2 per unit for product B.

Our constraint in that first example was demand.

We had one more customer come in at the end of the day and

want to purchase only one unit.

Then we have to choose which of the units we would push them towards.

We choose the higher profitability measure.

Profitability in this example,

was calculated in terms of the constrained resource, you can see that right there.

We have contribution margin per unit sold.

A and B are comparable in terms of these measures, and

we know that we get $3 for one of the units and two for the other.

But what happens when supply is constrained?

In that situation, we need a different measure.

Specifically, we're going to focus on contribution margin.

Again, fixed costs, or capacity costs,

remain the same regardless of what it is that we're doing.

So the revenue is minus the variable cost is the most

relevant measure of profitability in many of these decisions.

But we need constrained resource terms to be different.

No longer are we going to focus on contribution margin per unit sold, but

rather some contribution margin per unit of constrained resource.

When our most constrained resource is inside or

supply based, then we need to convert that contribution margin number

into a contribution margin per unit of our most scarce resource.

So suppose that machine time is our most constrained resource,

we would want to know what our contribution margin per machine hour is.

So that we can make the best decision to maximize profitability

given our constraint.

So lets continue with our example.

Real World produces two products.

Both products are manufactured using the same capacity.

Per unit financial information for both products is available to us.

We have product X and product Y.

The selling price for product X is 20 and the selling price for product Y is 25.

The variable costs are 6 and 13, respectively.

And so therefore, the contribution margin for product X is 14,

while it's 12 for product Y.

In addition, we know that machine time is limited.

Perhaps, there is plenty of demands for both of our products, but

before we can tap out that demand, we run out of machine time to do it.

And we know that product X takes two minutes of machine time per unit,

while product Y takes half that or one minute of machine time per unit.

So what we're going to do,

is convert our contribution margin per unit number into something more usable for

the scenario, where machine time is our most constrained resource.

Essentially, we know that the machine time is two minutes for product X and

one minute for Product Y.

So we can calculate the contribution margin per machine minute.

For product X, we know that the we earned $14 per unit.

However, it takes two minutes to create each unit.

So, if we are to take one minute of our machine time and

put it towards producing product X,

we would earn $7 worth of the contribution margin from that machine minute.

Compare that to Product Y, where we have $12 per unit,

and it only takes us 1 minute of machine time to produce that $12.

So if we were to take a machine minute and allocate it towards producing Product Y,

we would earn $12 in contribution margin.

Essentially, given that machine time is our most constrained resource,

product Y is our best product in terms of profitability.

If we had one minute left at the end of the day and

could allocate it towards product X or product Y, we would get a better

return from producing product Y with that minute than we would with product X.

$12 versus the $7.

Now let's have a checkpoint to make sure that we understand this issue.

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