ACCTG 101 Lecture Notes - Lecture 28: Sunk Costs, Payback Period, Cash Flow
Document Summary
The theory of constraints is a management tool for dealing with constraints. The theory of constraints identifies bottlenecks in the production process. Bottlenecks limit throughput, which can be thought of as the amount of finished goods that result from the production process. The ley to the theory of constraints is identifying and managing bottlenecks. Once a bottleneck is identified, management must focus its time and resources on reliving the bottleneck. Utilising resources to increase the efficiency of a non-bottle neck operation will rarely increase throughput. Lo6 decisions to sell or process further. The decision whether to sell a product as is or to process it further to generate additional revenue is another common management decision. The key in deciding whether to sell or process further is that all costs that are incurred up to the point where the decision is made are sunk costs and therefore not relevant. The relevant costs are the incremental or additional processing costs.
