CHAPTER 18
SYNCHRONOUS MANUFACTURING AND THEORY OF
CONSTRIANTS
Review and Discussion Questions
1. State the global performance measurements and operational performance measurements and
briefly define each of them. How do these differ from traditional accounting measurements?
Global performance measurement:
Net profit—measurement in dollars
Return on investment—generally a percent of the investment
Cash flow—the amount of cash available for day to day operations. From an accounting
standpoint, deductions such as for depreciation are added back in since depreciation is not
really money spent
Operational measurement:
Throughput—the actual rate of sales generated by the system
Inventory—all the money invested in things that are intended to be sold. This includes
raw materials, equipment, etc., but at the cost price, less any depreciation (which is
operating expense).
Operating expense—money spent to convert inventory into throughput. This includes
direct and indirect labor, materials, depreciation, administrative costs, etc.
Traditional accounting methods work with such things as standard costs, allocation of
burdens (which may consist of indirect labor, administrative costs, insurance, taxes,
depreciation, etc.), and gross profits, net profits, cost centers, profit centers, all of which may
be based on standards and allocations. These may not have any basis in reality.
Many examples can be cited where traditional accounting forces wrong decisions. One
specific example that one of the authors has confronted is of a V. P. of manufacturing who is
terminating a very profitable product line, because on paper this product line is losing money.
Why? Because overhead is allocated based on the amount of direct labor and this product
line is almost all-direct labor, with very little equipment involved. His allocation of everyone
else’s burden creates a paper loss. Under these circumstances he would lose his annual bonus
and be rated down in his performance.
Other areas of accounting differences: inventory in traditional accounting is carried the same
as cost of goods sold, i.e., with all the labor and burdens included. In operational
measurement’s terminology, inventory is carried as the cost of the raw materials.
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