Traditionally the accountant is trained to focus on product costs


The Theory of Constraints (TOC) and throughput accounting1 (Throughput accounting) have been identified as potentially important developments in management accounting research and practice (Noreen et al, 1995; Dugdale & Jones, 1998; Jones & Dugdale, 1998). More specifically Dugdale & Jones (1998) identified several areas for research, including the implications for accounting  systems in companies which had undergone a "paradigm shift" in perceptions  and values relating to manufacturing following the implementation of TOC, the role of critical success factors in the design of accounting systems, and the development of accounting measures to support TOC. Despite this, few studies of Throughput accounting have been published in accounting journals. This paper argues that it is timely for management accounting researchers to re-visit Throughput accounting and make it the focus of scholarly research. There are rare examples of studies that incorporate Throughput accounting; however these have been mainly published in the production management literature and these studies give little insight into the use or value of Throughput accounting systems. The common theme of this body of literature is the use of Throughput accounting to support decision-making (Long, Castellano & Roehm, 2002; Boyd & Cox, 2002: Corbett, 2006) in particular product-mix decisions (Himola, 2001; Souren, Ahn & Schmitz, 2005; Hilmola, 2005), the blending of TOC and activity-based costing (ABC) (Gupta, 2001; Gupta, Baxendale & Raju, 2002; Lea & Min, 2003; Kirche, Kadipasaoglu & Khumawala, 2005) and performance measurement (Lockamy & Spencer, 1998).

In a traditional cost accounting environment, the accountant is trained to focus on product costs, usually in extraordinary detail, rather than on the ability of the company to generate profits. Conversely, throughput accounting is least concerned with costs and most concerned with using the existing system (and the costs built into it) to generate the largest possible amount of profit. Which concept is right?

Under the traditional cost accounting approach, if the accountant is solely reporting on the cost of operations, then it is reasonable for management’s attention to be skewed in the direction of cost management, since this is the only information they see. However, nearly all costs fall into the operating expenses category of costs, and the primary purpose of that cost category is to support the ability of the company to produce throughput. Thus, an excessive degree of attention to cost reduction will eventually impact a company’s ability to produce throughput, so that profits may decline even faster than any cost reductions that have been achieved. This problem is especially difficult to perceive when the accountant identifies an excessive level of capacity in a non-constraint area, and proposes that the company save money by eliminating some portion of the excess capacity. What the accountant misses is how important that excess capacity may be. The total capacity at each center should be divided into three parts (Steven Bragg, 2007). The first is productive capacity, which is that portion of the total work center capacity needed to process currently scheduled production. The second part is protective capacity, which is that additional portion of capacity that must be held in reserve to ensure that a sufficient quantity of parts can be manufactured to adequately feed the bottleneck operation. Any remaining capacity is called idle capacity. Only idle capacity can be eliminated from a work center. If the eliminated capacity is the protective capacity, then the constraint resource will not have any inventory on which to work, and must shut down until its inventory inflow can be replenished .Thus, the reduction in capacity in order to cut costs may seem like a reasonable decision in the short term, until such time as a sufficiently large manufacturing problem results in a throughput drop precisely because of the missing capacity.

Throughput accounting has a very direct relationship with decision making and performance management. It begins by focusing on what an organization’s purpose is – its goal – and seeks to help organizations attain their purpose by increasing their ‘goal units’. The approach can be applied to both profit-seeking and not-for-profit organizations, provided meaningful goal units can be identified.

Throughput accounting first found by dr . Eliyahu M. Goldratt 1984 to help organizations achieve  their goal and gain more profits. First

Simplified accounting and measurement for the complicated world of global business seems like a dream that could never be true Relevance Lost (Johnson and Kaplan) and relevance regained (Johnson) provide a clear discussion on accounting’s rule in how business has suffered from the top-down management syndrome. This approach utilizes cost management data  in an attempt to control and manage costs in contrast to allowing empowered employees to improve business processes. Goldratt also picked up on the theme of misleading and useless cost accounting thinking and its disastrous impact on business operations and management thinking. The Theory of Constraints (TOC) answer to Relevance lost is throughput accounting. Throughput accounting has three main key elements

1- Throughput

2- Operating Expenses

3- Assets

Throughput is defined as the rate that a system generates money (i.e., incremental cash flow through sales that correlates to sales less direct material using traditional accounting terminology. Operating expenses are defined as the money the system spends to convert inventory into throughput. Direct labor is included under operating expenses and is assumed to be fixed expense. Assets in Throughput accounting are identical to assets in conventional accounting except for inventory. Inventory is defined as the money that the system spends on things it intends to convert into throughput.

Throughput accounting is very similar to variable costing. The table below compares Throughput accounting and variables costing

Variable Costing

Throughput accounting



Direct material

Direct material

Direct labor

Variable overhead



Fixed expenses

Operating expenses



Throughput Accounting identified the keys to achieving and maintaining a competitive edge at :

  • Superior quality
  • Better Engineering
  • High profit margins
  • Lower investment
  • On-time delivery
  • Shorter lead times

Throughput accounting is focused on the goal of optimizing profitability and linking the relationship to the three components necessary for its achievement. The goal was written at a time when maximum utilization of productive capacity was a key issue. Throughput is defined as sales less direct materials, so the emphasize was to maximize it in contrast to the :cost world” approach that focused on cost reduction. Throughput accounting is predicated on managing constraints to optimize inventory levels and control operating expenses, resulting in higher net profit and achievement of higher returns on investment.

Throughput accounting by Thomas Corbett defines the basic elements of Throughput accounting and describes fallacies of applying product costs associated with product mix and making bad decision.

The Measurement Nightmare by Debra smith provides an excellent description that explains the mess associated with applying GAAP to Throughput accounting and how to bridge the gap. Each effort provides understanding of a little-understood concept that offer great possibilities.

One of the driving forces of Throughput accounting is its predications on maximizing throughput and how it accomplish its objectives. Primary obstacles to maximizing throughput are scheduling and identifying constraints. Goldratt has provided us with some tools that are truly potent once we gain understanding and know where to apply focus and how to gain leverage.

Goldratt  has truly tried to help us not only to recognize problems associated with the “cost” world, but also he has provided a new decision process that was missing between the available data and the information that was needed.

Throughput accounting recognize that throughput is the highest priority. It is no different than Jack Welch of GE saying “the only real security we have is satisfied and loyal customers”. There have been extensive efforts to reduce costs, but increasing sales of the right products will produce greater profit than all the effort in the world to control and cut costs

Throughput accounting places its priority on maximizing throughput and minimizing any delay of throughput. It is not a sale until the product is delivered and ultimately not until it is paid for.

Throughput accounting is designed to answer three questions regarding management decisions, which are:

  • What is the decision’s impact on throughput ?
  • What is the decision’s impact on investment?
  • What is the decision’s impact on operating expenses?


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