Throughput accounting

Throughput Accounting is a concept that is related to the principles of managerial accounting. It is an alternative that was proposed by Eliyahu M. Goldratt. Throughout accounting is defined as a dynamic, integrated, principle-based, and comprehensive management accounting approach that provides managers with decision support information for enterprise optimization. Throughput accounting is neither based on the standard costing or the activity based costing method. It is not a costing method and it does not allocate costs to products and services.

Throughput accounting is a method that improves the profit performance with better management decisions by using measurements that more closely reflect the effect of decisions on three critical monetary variables (throughput, inventory, and operating expense). Throughput accounting considers the organization’s ideas or goals and also determines how to best increase the production output from each idea or goal to maximize the economic wealth of the company. The Theory of Constraints management method by Goldratt is an important foundational building block for throughput accounting.

The theory of constraints management method is based on five steps. The first one is to identify the constraint limiting the company’s goal or objective. The next step is for managers to decide how to avoid the constraint and limit the company’s resources from being wasted on the constraint. The next two steps involve putting aside minor business constraints and putting the biggest constraints first when improving business methods. The final step should be the result of having the major constraint removed from the production process; if it still exists, then the company may need to start over on the theory of constraints process.

Throughput accounting is applied to the theory of constraints management method to the cost accounting functions of a company. Throughput accounting does not focus only on maximizing individual profits from goods or services. The main focus of this accounting method is to lower the business investments or expenses found in the production process.

Questions

• What is throughput accounting?
• What is the theory of constraints management? How is it related to throughput accounting?