The premise upon which the entire Theory of Constraints philosophy is constructed, is that organizations can achieve their goal more effectively by driving higher levels of throughput through the operating systems as opposed to driving down cost everywhere. It is not to say that cost management is unimportant, but that it should be managed in order to support higher throughput rather than being managed as a goal in and of itself.

Traditional cost accounting practices are based on some model of cost allocation in order to determine product cost and product profit. This information is used to determine whether products should be introduced or discontinued, markets should be entered, and plants closed down.

This method of calculation is perfect for managing in a cost-driven managerial paradigm, but frequently supports the wrong decisions in a throughput-driven managerial paradigm. Using cost-based decision models in a throughput-constrained company leads to the wrong decisions.

When implementing a throughput paradigm, the financial decision models and performance measurements must be carefully examined and reconfigured to insure that the decisions and commensurate actions are aligned.

Throughput Accounting serves to build a management accounting model that enables you and your managers to:

  • Make cost and resource allocation decisions that will result in maximizing throughput
  • Insure that decisions are aligned across the sub-systems to prevent conflicting decisions and actions
  • Provide management with the right decision support information

Throughput Accounting serves to build a management accounting model that enables you and your managers to:

  • Products that were considered loss-makers, turned out to be the most profitable.
  • Market considered to be insufficiently attractive, became the most profitable.

The simple TOC measures of Throughput, Inventory and Operating Expense (T,I,OE) bring a high degree of internal alignment and consistency to business decisions up, down and across the organization.

If you are interested in learning more about Throughput Accounting and how it can be deployed in your environment, contact us at contact@www.theoryofconstraints.org today. Don’t let bad decisions cost you more money!