Theory of constraints - part 2

In this lesson

1. 0:00 Theory of Constraints and throughput accounting overview
2. 1:02 Return per factory hour calculation explained
3. 2:04 Cost per factory hour and overhead absorption
4. 4:03 Throughput accounting ratio calculation
5. 5:22 Interpreting throughput accounting ratio benchmarks
6. 6:45 Worked example with three products
7. 8:31 Production ranking and profitability analysis

About this lesson

These calculations help you identify which products to prioritise based on their profitability relative to bottleneck constraints, and determine whether production is worthwhile. By the end, you'll understand how to rank products for maximum profit and use the throughput accounting ratio benchmark of one to assess product viability. This is core to Performance Management and Strategic Business Leader papers, where Theory of Constraints questions require you to optimise production decisions under resource constraints. The video works through the methodology step by step. Return per factory hour is calculated per product (throughput per unit divided by bottleneck time per unit) and shows the return generated per hour of constraint. Cost per factory hour is a single factory-wide figure (total factory costs divided by total bottleneck time available) representing the average hourly spend on fixed costs. The throughput accounting ratio then divides return per factory hour by cost per factory hour for each product. A ratio above one signals profitable production; below one flags concern and signals the need for improvement. You'll see these concepts applied to a three-product scenario with worked calculations. Product A achieves a ratio of three, Product B achieves 2.5, and Product C falls to 0.8. This practical example shows how the ranking informs production priority and how the benchmark helps you quickly identify which products warrant attention. Understanding these measures equips you to answer exam questions confidently and apply constraint theory to real business decisions.

Duration: 11m