Throughput accounting
Throughput Accounting (TA) is a principle-based and
simplified management accounting approach that provides managers with decision
support information for enterprise profitability improvement. TA is relatively
new in management accounting. It is an approach that identifies factors that
limit an organization from reaching its goal, and then focuses on simple
measures that drive behavior in key areas towards reaching organizationalgoals. TA was proposed by Eliyahu M. Goldratt[1] as an alternative to traditional
cost accounting. As such, Throughput Accounting[2] is neither cost accounting
nor costing because it is cash focused and does not allocate all costs
(variable and fixed expenses, including overheads) to products and services
sold or provided by an enterprise. Considering the laws of variation, only
costs that vary totally with units of output (see definition of T below for
TVC) e.g. raw materials, are allocated to products and services which are
deducted from sales to determine Throughput.[3] Throughput Accounting is a
management accounting technique used as the performance measure in the Theory
of Constraints (TOC).[4] It is the business intelligence used for maximizingprofits, however, unlike cost accounting that primarily focuses on 'cutting
costs' and reducing expenses to make a profit, Throughput Accounting primarily
focuses on generating more throughput. Conceptually, Throughput Accounting
seeks to increase the speed or rate at which throughput (see definition of T
below) is generated by products and services with respect to an organization's
constraint, whether the constraint is internal or external to the organization.
Throughput Accounting is the only management accounting methodology that
considers constraints as factors limiting the performance of organizations.
Management accounting is an organization's internal set of
techniques and methods used to maximize shareholder wealth. Throughput
Accounting is thus part of the management accountants' toolkit, ensuring
efficiency where it matters as well as the overall effectiveness of the
organization. It is an internal reporting tool. Outside or external parties to
a business depend on accounting reports prepared by financial (public)
accountants who apply Generally Accepted Accounting Principles (GAAP) issued by
the Financial Accounting Standards Board (FASB) and enforced by the U.S.
Securities and Exchange Commission (SEC) and other local and international
regulatory agencies and bodies such as International Financial Reporting
Standards (IFRS).
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