Throughput accounting is an offshoot of variable cost accounting that treats direct material costs as the only variable cost, while all other costs are assumed to be fixed, explains Richard J. Lukesh of Turnaround.org. The accounting approach was developed by Eliyahu Goldratt as part of the Theory of Constraints paradigm.Continue Reading
In contrast with traditional accounting approaches, throughput accounting focuses on the impact of financial decisions on an entire system and not just on the particular area on which an investment is made, notes Accounting Tools. This is because the cost of production is borne by an entire system and not by the individual item that is the object of the production process. For instance, a car manufacturer would still have to meet costs such as salaries, utilities and insurance even during periods when no vehicles are made. For this reason, throughput accounting primarily focuses on the production process and not the products. This focus encourages system-wide changes, notes Lukesh.
From the overarching perspective of throughput accounting, there are only three ways of boosting profitability: reducing investment, reducing fixed costs or increasing throughput. Throughput refers to less variable expenses such as commissions and costs of direct materials. The level of investment needed in order to give a production system the capacity to make a certain number of units and operating expenses, typically the costs incurred in maintaining the production system, is also taken into account when calculating profitability in throughput accounting.Learn more about Accounting