What is Throughput Accounting?

Throughput Accounting (TA) can be understood as a simplified accounting system based on Theory of Constraints (ToC) principles. TA makes growth-driven management and decision making simpler and understandable even for people not familiar with traditional accounting.

Beyond simplifying, TA has a different approach compared to traditional accounting. The latter will focus on cost control (cost of goods sold) and minimizing the unit cost while TA strives to maximize profit.

Throughput Accounting sets the base for Throughput Analysis, helping to make decisions in the ToC way.

Simplifying accounting

Throughput Accounting will probably not replace GAAP in short nor medium term, but provides a limited set of simple KPIs, sufficient to:

  • Manage and make decisions in a growth-oriented and ToC way
  • Allow faster reporting and near to real-time figure-based management
  • Help people in operations to understand the basics of accounting
  • Set a common base for controllers and operations to discuss decisions, investments, etc.

Throughput Accounting uses 3 KPIs and 2 ratios:

Throughput (T)

Throughput, defined as the rate of producing goal units (usually money) and translates as revenue or sales minus totally variable expenses in accounting terms.

Totally variable expenses can be simplified to the cost of direct materials because labor is nowadays paid on a (relatively) fixed amount per time period, hence a constant expense to be considered as part of Operating Expenses.

Operating Expenses (OE)

Operating Expenses are all expenses, except the totally variable expenses previously mentioned in the calculation of throughput, required to run and maintain the system of production. Operating Expenses are considered fixed costs, even so they may have some variable cost characteristics.

Investments (I)

Investments, formerly call Inventories, is the amount of cash invested (formerly “tied”) into the system in order to turn as much of the Investments into Throughput as possible. This encompasses the stored raw material waiting to be transformed into sellable products as well as investments in capacities / capabilities to produce more units.

Net Profit (NP)

Net Profit is defined as Throughput minus Operating Expenses, or Sales – Total Variable Costs – Operating Expenses.

Return On Investment (ROI)

Return On Investment is the Net Profit compared to Investments (ROI = NP/I).

Drivers for achieving the Goal

Throughput Accounting offers a simplified way to identify and use the drivers to achieve the Goal, assuming the Goal is to make money now and in the future.

In a very simple way this can be summarized by the following picture which means strive to maximize Throughput while minimize the Operating Expenses and Investments.

ToC practitioners recognize that Throughput has no limit while Operating Expenses and Investments have limits beyond which no safe operations can be further envisioned.

The priority focus on improving T (focusing on the constraint exploitation) rather to go for all-out cost cutting explains the (usually) superior results when going the ToC way compared to unfocused improvements.

Throughput Accounting KPIs can be presented in a Dupont-inspired model in order to make the levers and consequences clear. (graphics to come)

Throughput Analysis

Beyond the simplification compared to traditional accounting, Throughput Accounting sets the base for Throughput Analysis, helping to make decisions in the ToC way.

Reminder: in a system with a capacity constraint, the Throughput is limited and controlled by the sole constraint. As the capacity is fully used and no spare is available to exploit, what goes through the constraint must be chosen wisely in order to make the best use of this very precious resource.

It becomes obvious then that utmost attention must be paid to maximize the passing of the highest profit generating products through the constraint. The decision making is then based on the Throughput per constraint minute rate. The higher the T/mn, the better.

Other decisions Throughput Analysis helps to make are about anything likely to alter the Throughput, Operating Expenses or investments. Basically, any incremental increase of OE and/or I should lead to an incremental increase of T.

Conversely any decrease of OE and/or I should NOT lead to an incremental decrease of T.

This post is partly inspired by the work of Steven Bragg. I recommend his blog and post about Troughput analysis http://www.accountingtools.com/throughput-analysis

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8 thoughts on “What is Throughput Accounting?

  1. Pingback: What is Throughput Accounting? | Chris Hohmann ...

  2. Hi Chris, as always I appreciate your posts. This time I need a piece of advice from you re: accounting. I’m about to write a short post of ROI in classical (GAAP) environment. My point is that process upgrades or game-changer decision are still based on ROI (Business Case) approach which is killing changes like lean solutions or safety improvements. I mean all the changes which are not that visible in savings, quantifiable savings, are subject to NO decision. Unless you manipulate figures and use guesstimates as real money data you will end up with NO.

    How to approach this with Throughput Accounting? Does applying TA change anything? Does it propose any solution to this dilemma?



    • Hi Alex, thank you for commenting.

      Your question is a recurring topic and an endless debate between the “cost world” (traditional cost accounting) and “Throughput world” (revenue oriented).

      This led to develop alternate dashboards like balanced scorecard, lean box score and “accounting systems” like lean accounting or throughput accounting.

      Whatever operational-oriented system, GAAP cannot be discarded, so there is a necessary schizophrenia in using two systems.

      From my experience, the ops guys do what is required to boost results and let accountants collect figures and compute their sheets. As long as the bottom line improves, nobody really cares what kind of magic was used.

      If ROI-backed up blessing is required in order to start an improvement initiative, it is likely to be doomed from the beginning, especially when the game-changing transformation is something that was never done. (Note that a burning platform usually helps a lot.).

      If CEO/CFO can be introduced to Theory of Constraints and Throughput Accounting, chances are that they backup the initiative. (we are currently in such a case with a client).

      Finally I tend to make mine the advice Bill Dettmer gave me: “it’s more efficient to apologize for having taken an initiative than to ask for authorization”. You will be forgiven if it led to noticeable success.

      Hope this helps!


      • This is the never-ending debate. CFO shall understand the difference between external reporting (in that case GAAP or IFRS cannot be superseeded) from internal management reporting.
        For the latter, TA is definitely superior as it eliminates all the distortions tha Full Manufacturing Costing model brings (incentivation of inventories, wrong profitability analysis, and so on). This is the work of TOC consultants to bring together CFOs COOs and Suppy Chain Manager (shall be the room of S&OP) to adopt a really managerial accountig system to drive management decisions.


  3. Pingback: What is Throughput Accounting? | Leverage DDMRP...

  4. Pingback: What is Throughput Accounting? – max.bback.se

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