Throughput Accounting is a modern management accounting technique that offers an
alternative view to the more traditional cost accounting.
It’s all about identifying the constraint or limiting factor in the production process
and exploiting it to maximise profit. It allows management to focus efforts to make the
best possible use of the limitation.
Theory of Constraints “TOC”
Goldratt’s Theory of Constrains is a methodology that is covered in the CIMA P2
syllabus and can be applied to systems that are unable to fulfil their goals or targets.
Goldratt suggests that any process is only as strong as it’s weakest link and all effort
should be focused on removing the constraint by following a five step process.
The constraint in a manufacturing environment is also referred to as a “bottleneck”
1.
2.
3.
4.
5.
Identity Constraint
Decide how to exploit the constraint
Sub ordinate other activities/non-constraints
Elevate the constraint
Repeat the process
These five steps ensure the organisation has an ongoing improvement that is based on
the identified constraints or weak links.
And it’s measurements are given via Throughput Accounting – which Goldratt describes
as key performance measure.
Throughput Accounting
Is also known as the rate at which the system generates money, it is measured in
monetary terms and naturally linked to profitability. Therefore, the objective is achieve
the maximum possible throughput profit or “flow”.
Throughput Accounting is based around achieving the maximum possible net profit in a
limited time frame with limiting conditions. The formulas used and and a scenario
based example is the best way to illustrate how Throughput Accounting can be used and
the principles behind it.
Formula and Ratios
Throughput $ = Sales Revenue less Direct Material Costs
Throughput Accounting Ratio (TPAR) = Return per factory
hour/Cost per factory hour
Return per factory hour = Throughput $ per unit/Time per unit
Cost per factory hour = Total factory cost/Total time available
The two key formulas here are the Throughput $ and the TPAR – the other formulas are
required to understand how to calculate the TPAR.