What is Throughput Accounting?
Throughput accounting is a management accounting approach based on the Theory of Constraints (TOC). It focuses on maximizing throughput — money generated through sales — rather than minimizing costs, by managing the system's bottleneck.
Throughput accounting measures profitability as Throughput = Sales Revenue − Totally Variable Cost, then optimizes production around the bottleneck (constraint) to maximize it.
- 1↓Identify the constraintFind the bottleneck limiting the whole system's output.
- 2↓Exploit the constraintGet maximum output from the bottleneck without new investment.
- 3↓Subordinate everything elseAlign all other processes to support the constraint's pace.
- 4↓Elevate the constraintInvest in more capacity at the bottleneck if still needed.
- 5Repeat the processOnce resolved, find the next constraint and start again.
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Step-by-step worked examples
A product sells for $120 and has totally variable (material) cost of $45. What is throughput per unit?
T = SP − TVC T = 120 − 45 = $75 per unit
The bottleneck machine has 400 minutes/day available. A product needs 5 minutes on the bottleneck and generates $75 throughput. What is throughput per bottleneck minute?
Throughput per bottleneck minute = Throughput per unit ÷ bottleneck minutes per unit = 75 ÷ 5 = $15 per minute
Factory costs (excl. materials) are $6,000/day and the bottleneck has 400 minutes available. What is the cost per bottleneck minute, and is a product needing 5 minutes/unit with $15/min throughput worth producing (TAR)?
Cost per bottleneck minute = 6,000 ÷ 400 = $15/minute TAR = Throughput per minute ÷ Cost per minute = 15 ÷ 15 = 1.0 TAR = 1 means breakeven; TAR > 1 is profitable
Flashcards
Quick quiz
Q1.Selling price is $200, totally variable cost is $80. What is throughput per unit?
Q2.What does throughput accounting primarily aim to maximize?
Q3.What is a bottleneck (constraint) in TOC?
Q4.If TAR (Throughput Accounting Ratio) is less than 1, what does it mean?
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Common mistakes
Throughput accounting focuses on minimizing all costs equally. — Correct: It focuses on maximizing throughput through the bottleneck; not all costs matter equally short-term.
Labor cost is always treated as variable in TOC. — Correct: In throughput accounting, only truly variable costs (mainly materials) count as TVC; labor is often treated as fixed short-term.
Any idle resource is a constraint. — Correct: Only the resource that limits total system output is the true bottleneck.
TAR of exactly 1 means high profit. — Correct: TAR = 1 is breakeven; genuine profit requires TAR > 1.
FAQ
What is throughput accounting?
A management accounting method based on the Theory of Constraints that maximizes throughput (sales revenue minus totally variable cost) through the system's bottleneck.
What is the throughput accounting formula?
Throughput = Selling Price − Totally Variable Cost. The Throughput Accounting Ratio = Throughput per bottleneck minute ÷ Cost per bottleneck minute.
What are examples of throughput accounting?
Prioritizing products with the highest throughput per bottleneck minute on a constrained machine is a classic throughput accounting example.
How do you calculate throughput accounting metrics?
Subtract totally variable cost from selling price to get throughput per unit, then divide by bottleneck minutes per unit to rank products.