## **Learning Outcomes**

After reading this article, you will be able to identify bottlenecks in business operations, explain how constraints impact throughput, and apply throughput accounting ratios to prioritise production. You will understand practical methods for managing bottlenecks and be prepared to evaluate organisational performance where process constraints affect profitability. These skills are essential for the ACCA Advanced Performance Management exam.

## **ACCA Advanced Performance Management (APM) Syllabus**

For ACCA Advanced Performance Management (APM), you are required to understand how constraint and throughput management supports organisational performance. This article is relevant for revision in the following syllabus areas:

- The objectives and principles of throughput accounting
- Methods for identifying and analysing bottleneck resources in business processes
- Use and calculation of throughput accounting ratios (TPAR)
- Approaches to prioritising production when constraints exist
- Strategies to exploit, manage, or relieve bottlenecks to increase throughput
- Evaluation of the effects of bottleneck management on profit and strategic performance

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. What is a bottleneck in the context of constraint and throughput management?
2. Which action is most effective for increasing output where a resource is the bottleneck?  
   a) Increase output of non-bottleneck processes  
   b) Improve the capacity at the bottleneck  
   c) Reduce selling prices to boost demand  
   d) Focus only on direct labour cost reduction
3. True or false? When a constraint exists, throughput per minute or hour of the bottleneck is the key measure for maximizing profitability.
4. List two actions management can take to better exploit a bottleneck resource.

## **Introduction**

Constraint management and throughput accounting are critical where operational bottlenecks limit an organisation’s ability to meet demand. A bottleneck is the resource or process that restricts total output, making it essential to identify and prioritise actions at this point. By focusing on maximising throughput—the value generated from sales less direct material costs—through the constraint, organisations can improve overall profitability without incurring unnecessary costs elsewhere. This article explains bottleneck identification, the use of throughput accounting ratios, and practical techniques to exploit constraints effectively.

> **Key Term: Bottleneck**
> A step in a business process with insufficient capacity to meet demand, and which therefore limits the throughput of the entire system.
>
> **Key Term: Constraint**
> Any factor that restricts an organisation’s output or achievement of objectives, such as machine hours, skilled labour, or material availability.

## Identifying Bottlenecks and Constraints

A bottleneck is found by comparing the capacity of each step in a production or service process. The process with the lowest capacity for the required demand is the constraint. Typical bottlenecks are:

- Machines that process slower than others
- Workers with scarce specialist skills
- Limited inputs (material or energy)
- Unexpected downtime or long changeovers

Identifying the bottleneck allows you to focus improvement efforts where they will have the greatest effect on throughput.

> **Key Term: Throughput**
> The cash generated from sales revenue minus direct material costs. In throughput accounting, all other costs are considered fixed in the short term.

## Throughput Accounting and Bottleneck Analysis

Traditional profit analysis focuses on maximising contribution or minimising costs. Throughput accounting shifts attention to maximising throughput per limiting resource. If a bottleneck exists, prioritise products or services that yield the most throughput per unit (minute, hour, etc.) of the constrained resource.

> **Key Term: Throughput accounting**
> A management accounting approach that aims to increase the rate of generating money through sales after deducting only direct material costs, treating other costs as fixed in the short term.
>
> **Key Term: Throughput accounting ratio (TPAR)**
> A measure comparing the throughput generated per minute or hour of a bottleneck resource to its cost, used for ranking product or process priorities.

### Calculating Throughput per Bottleneck Resource

When products compete for a scarce resource, calculate throughput per minute or hour of that resource:

Throughput per bottleneck hour = (Selling price – Direct material cost) ÷ Bottleneck hours per unit

Then, use the Throughput Accounting Ratio (TPAR):

TPAR = Throughput per unit of constraint ÷ Cost per unit of the constraint

A higher TPAR suggests greater profitability per unit of bottleneck resource, providing a clear basis for prioritisation.

### **Worked Example 1.1**

A company produces Product X and Product Y using the same specialist worker, who is the bottleneck. Each hour costs £40 in labour and overhead. Product X provides £50 throughput and requires 0.8 hours. Product Y provides £36 throughput and takes 0.3 hours.

**Question:** Which product should receive priority in production to maximise profit? Calculate the TPAR for each.

> **Answer:**
> Throughput per hour:
>
> - Product X: £50 / 0.8 = £62.50
> - Product Y: £36 / 0.3 = £120
>
> TPAR:
>
> - Product X: £62.50 / £40 = 1.56
> - Product Y: £120 / £40 = 3.00
>
> Product Y should be prioritised, as it delivers more throughput per bottleneck hour and a higher TPAR.

## Exploiting Bottlenecks for Greater Throughput

After identifying the bottleneck, management must take specific actions to fully exploit its capacity. This means:

1. Maximising the use of the bottleneck at all times
2. Ensuring only high-priority, high-TPAR products are processed
3. Subordinating all other operations to support the bottleneck
4. Investigating if bottleneck capacity can be increased

### Methods to Maximise Bottleneck Output

- Schedule production to prioritise high-throughput items through the bottleneck
- Reduce or eliminate downtime (set-up time, maintenance, or breaks) at the constraint
- Move any preparation or finishing work to non-bottleneck resources
- Add temporary capacity (overtime, extra shifts, or equipment) if justified by increased throughput
- Review and streamline the process for waste or avoidable delays

### **Worked Example 1.2**

A bakery’s oven is the bottleneck, operating 7 hours daily but losing 40 minutes to cleaning and changeover. The lost output is estimated to reduce throughput by £160 per day.

**Question:** What practical steps can management take to increase throughput, and what is the potential financial impact?

> **Answer:**
> Management should:
>
> - Minimise changeover and cleaning time by standardising procedures or scheduling production in larger batches
> - Arrange pre- or post-oven work elsewhere to avoid bottleneck idle time
> - Cross-train staff to support quick changeovers
>   Every extra minute regained at the oven directly increases output and profit, so saving 40 minutes per day could recover £160 of contribution for each day regained.

### **Exam Warning**

> In throughput and constraint questions, avoid recommending efficiency improvements in non-bottleneck areas until the bottleneck is fully exploited. Efficiencies elsewhere do not increase total system output unless the constraint is addressed first.

## Increasing Bottleneck Capacity

If, after exploitation, the bottleneck remains a limiting factor, consider whether it is cost effective to expand the constraint:

- Invest in new or additional equipment
- Source more skilled staff
- Outsource part of the process
- Rethink product mix to shift the bottleneck

Cost–benefit analysis is essential: capital or resource investment must be justified by the additional profit created from increased throughput.

### **Worked Example 1.3**

A factory’s bottleneck machine is already fully utilised. By spending £8,000 on equipment upgrades, capacity can be increased by 10%. Expected extra throughput from this upgrade is £25,000 per year.

**Question:** Should management proceed with this investment?

> **Answer:**
> Incremental throughput is £25,000 per year for a one-off cost of £8,000, assuming no other constraints arise. This is a positive return and should be accepted, subject to confirming there are no other limiting factors and ongoing costs do not erode the benefit.

## **Summary**

Managing bottlenecks is about maximising throughput at the point of greatest limitation. Throughput per minute/hour of the constraint is the essential metric for short-term decision making. Only after fully utilising the bottleneck should resources be invested to expand or relieve the constraint, provided the financial benefits exceed the costs. Focusing operations and improvement efforts on the true constraint delivers the greatest profit impact for the organisation.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Explain bottlenecks and their role in constraining organisational throughput
- Calculate throughput per unit of bottleneck resource and the throughput accounting ratio (TPAR)
- Apply throughput analysis to prioritise production or services under constraint conditions
- List and justify practical steps to exploit bottlenecks and increase throughput
- Evaluate whether bottleneck capacity should be increased, and how to do so
- Avoid common exam errors, such as focusing on non-bottleneck efficiencies first

## **Key Terms and Concepts**

- Bottleneck
- Constraint
- Throughput
- Throughput accounting
- Throughput accounting ratio (TPAR)

Throughput and constraint management - Bottleneck identification and exploitation