ACCA Performance Management (F5) Certification Practice Exam

What does TPAR being less than 1 suggest?

1. Throughput is sufficient to cover operating costs

2. Operating costs exceed throughput, resulting in a loss

3. Product demand is insufficient

4. Production efficiency is optimal

The correct answer is: Operating costs exceed throughput, resulting in a loss

When TPAR, or Throughput to Operating Ratio, is less than 1, it indicates that the throughput generated by the production process is not sufficient to cover its operating costs. In this context, throughput refers to the rate at which the system generates money through sales, while operating costs include all expenses needed to maintain operations. When TPAR is below 1, it implies that the revenues from sales are less than the costs incurred to produce the goods or services, leading to financial losses. This situation is critical for management as it signals that either operational adjustments need to be made to enhance throughput or a review of pricing and production costs is necessary to ensure profitability. Analyzing the other options, if throughput were sufficient to cover operating costs, TPAR would be equal to or greater than 1, ruling out the first choice. A lack of product demand could be a contributing factor to low throughput but is not directly indicated by TPAR itself. Thus, TPAR being less than 1 doesn’t specifically conclude that production efficiency is optimal since efficiency is determined by different metrics, not strictly related to the relationship between throughput and operating costs.