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.