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Resource Allocation Decisions

Managerial Accounting

Prepared by Diane TannerUniversity of North Florida

Chapter 9

Production ConstraintsConstraints occur when the capacity to manufacture a product or provide a service is limited in some manner Examples

Labor Skilled craftspeople

Facilities Special machinery Limited factory space

Materials Limited availability

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Influence of Constraints

Limited resources may cause management to focus on the constraint instead of the contribution margin per unit

Goal Determine the most profitable

allocation of resources i.e., which product will contribute the most

to profit

3

Decisions When Resources are Limited

If products are mutually exclusive Occurs when events do not occur at the same time i.e., a customer will buy one product instead of the

other; does not insist that both be purchased If products are not mutually exclusive

Occurs when customers insist on having more than one product available

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Limited Resource Decisions When Products are Mutually Exclusive

How to select products to produce/sellStep 1: Determine contribution margin per unit

per constrained resource of each product or service

Step 2: Choose the product/service with the highest CM per constrained resource to produce; Produce zero of the other products

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Limited Resource Decisions When Multiple Product Production Required

How to select products to produce/sellStep 1: Determine contribution margin per unit per

constrained resourceStep 2: Choose the product/service with the lowest CM

per constrained resource to produce the product with the minimum quantity required

Step 3: Determine the resource used for the product with minimum units

Step 4: Subtract the resource to be used for the product with minimum units from the total resource available

Step 5: Allocate the remaining resource to the second product

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Mutually Exclusive AllocationWatCo manufactures and sells two products. Customers will buy either product with no demand on other products. There are 1,200 machine hours available.

X21 R45Selling price $55 $88Variable costs $30 $48Machine hours 2.5 4.2

 Step 1: Contribution margin per unit of limited resourceX21: ($55 - $30) / 2.5 hours = $10 /machine hour

R45: ($88 - $48) / 4.2 hours = $9.52 /machine hour

Step 2: Produce only the product with the best use of the resource.

Product X21: 1,200/2.5 = 480 unitsProduct R45: 0 units

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Non-Mutually Exclusive AllocationWatCo must produce a minimum of 100 of each product. There are 1,200 machine hours available.

X21 R45Selling price $55 $88Variable costs $30 $48Machine hours 2.5 4.2

Step 1: Contribution margin per unit of limited resourceX21: ($55 - $30) / 2.5 hours = $10 /machine hour

R45: ($88 - $48) / 4.2 hours = $9.52 /machine hour

Step 2: Produce minimum units of the least profitable productProduct R45: 100 units Usage = 100 * 4.2 = 420 hours

Step 3: Use all remaining resources on the most profitable product.Remaining hours: 1,200 – 420 = 780Product X21: = 780/2.5 = 312 units

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The End