Throughput accounting is a principle-based and simplified version of management accounting. It provides management with decision support information to improve the enterprise’s profitability and it is relatively new in management accounting.
Throughput accounting uses an approach that identifies factors that limits an organization from reaching its goal. Then it focuses on simple but effective measures that drive behavior in key areas toward reaching certain organizational goals. This form of accounting was proposed by Eliyahu Goldratt and he intended it as an alternative to the traditional cost accounting. Throughput accounting is neither cost accounting nor costing because it is cash-based. It does not allocate all costs to products and services sold or provided by the enterprise.
Throughput accounting is a management accounting technique that is used as the performance measure in the Theory Of Constraints. It is in a sense, the business intelligence for maximizing profit and primarily focuses on generating more throughput.
This means that the main goal is to increase the speed at which throughput is generated by products and services but has to respect the enterprise’s constraint. It is the only management accounting methodology that considers the constraints of a business as factor that limits its performance.
History of Throughput Accounting:
When cost accounting came to be in the 1980s, labor was the largest fraction of product cost and it could be considered to be a variable cost. Workers often did not know how many hours they would work in a week because time-keeping systems were crude and unreliable back then. Cost accountants then concentrated on how efficiently managers used labor since it was their most important resource but it was variable. Since then, workers know exactly how long they will work during the week, whether its by their rosters or fixed hours. Their cost has been fixed, rather than being a variable and the business.
Goldratt argued that labor efficiencies lead to decisions that harm the enterprise, rather than help it. Throughput Accounting removes the reliance on standard cost accounting on efficiencies in general and labor efficiency from management practice. Many cost and financial accountants agree with Goldratt’s statement but none have come up with a replacement of their own and the resistance from accountants trained in current practices, are enormous.
Benefits from using Throughput Accounting:
- Focuses on sale efforts on those products and services that truly make more money.
- Better judgment on which investments will contribute to financial success.
- Make decisions that are based on the real effect on the bottom line.
- Clearer understanding of the contribution that sub-systems make to the whole system.
- More realistic reporting of the effectiveness of the system as whole in relation to its goal.