Bottleneck Accounting
Bottlenecks
A company usually has several processes involved in the production and selling of a product or service.
For example:
In practice, bottlenecks will usually arise to constrain the amount of products the firm can deliver (Kaplan and
Atkinson, pp. 62). A bottleneck is a process that has a low output and limits total sales. If a firm want to increase
sales, it has to solve it's bottlenecks.
Traditional Variance Analysis
In a traditional variance analysis, managerial accountants analyse the differences between budgeted sales and
actual sales. Typicaly differences between budgeted sales and actual sales are
analysed as below (see also Horngren and Foster, pp. 138-271).
| budgeted sales: | € | 12,300,000 |
the actual number of products sold was lower than budgeted: negative volume variance: |
-/- € |
1,230,000 |
the actual selling price was lower than budgeted: negative price variance: |
-/- € |
180,000 |
| -------------------------- | ||
| actual sales | € | 10,890,000 |
This traditional variance analysis however does not point out which of the business processes were bottlenecks, which coursed the negative volume variance. That is why a variance analysis can't be used to solve bottlenecks in an organization.
Bottleneck Accounting
With Bottleneck Accounting, managerial accountants determine the bottlenecks in an organization.
A Bottleneck Accounting report shows which processes were bottlenecks and how much money was lost in
each bottleneck: for example:
| budgeted sales: | € | 12,300,000 |
bottleneck production department II: |
-/- € |
830,000 |
bottleneck sales department: |
-/- € |
400,000 |
the actual selling price was lower than budgeted: negative price variance: |
-/- € |
180,000 |
| -------------------------- | ||
| actual sales | € | 10,890,000 |
This report does not only point out which are the bottlenecks to solve, it also shows which bottleneck is to be handled first. In this case the production department II was the biggest bottleneck and € 400,000 was lost during the concerned period because of this bottleneck. Solving the production department II bottleneck should be top priority (see also Veltman and Bulte, pp. 46-61).
For more information on Bottleneck Accounting visit the official website of the Institute of Bottleneck Accounting
BIBLIOGRAPHY
- Horngren, C. T. and G. Foster, 'Cost Accounting, A Managerial Emphasis', Prentice-Hall, Inc. 1987
- Kaplan, R.S. and A.A. Atkinson, ‘Advanced Management Accounting’, Prentice-Hall International Inc. 1989
- Veltman, M. and J. Bulte, 'Relevance Lost and Relevance Regained', Erasmus University Rotterdam 1995
