Throughput Accounting

Throughput Accounting

Throughput Accounting (TA) is an alternative to cost accounting . TA is the first approach that factors in the most important element missing in all of the cost-based accounting approaches—Throughput. Throughput can be defined as the rate at which the company generates money through sales. Throughput accounting is not costing as it does not allocate all costs to products and services. It is a technique used as the performance measures in the Theory of Constraints (TOC). It can be viewed as business intelligence for profit maximization but unlike cost accounting that primarily focuses on 'cutting costs', throughput accounting focuses on generating more throughput. TOC has clearly demonstrated the pivotal role of constraints in determining Throughput, and the need to synchronize everyone’s efforts to support the constraint.

Throughput is only achieved from the coordinated efforts of all parts of the business—product development, sales, marketing, manufacturing, finance, etc. must all do their job to achieve Throughput. If any one “link” in this “chain” doesn’t deliver, Throughput is in danger. The implication is that Throughput depends on the strength of the entire chain as a system, not on the isolated performance of a single “link.”Since a chain’s strength is only that of its weakest link, this “constraint” determines the Throughput of the entire system. Other resources by definition have extra capacity versus the constraint. Cost-based systems fail to recognize the critical role of constraints and treat all areas as equally important.

Alternatives to throughput accounting

Cost Accounting
Cost accounting is that part of management accounting which establishes budget and actual cost of operations, processes, departments or product and the analysis of variances, profitability or social use of funds. Managers use cost accounting to support decision making to reduce a company's cost and improve its profitability. As a form of...