A basic note on throughput accounting – for advanced management accounting students

A basic note on throughput accounting – for advanced management accounting students

 

Highlight 5 main ideas of throughput accounting and provide a simple calculation example on throughput accounting.

Throughput accounting (TA) is a short-term decision-making approach that focuses on maximizing cash generated through sales while managing the resource that limits the whole operation—the bottleneck. It is closely linked to the Theory of Constraints.

Five main ideas

1.    Throughput is the key measure of value.
Throughput is sales revenue minus totally variable costs, usually direct material costs:

Throughput=Sales revenue−Direct material cost

It counts only when goods are actually sold, not merely produced.

2.    Most other operating costs are treated as fixed in the short run.
Labor, rent, utilities, depreciation, and overheads are grouped as total factory costs or operating expenses; TA generally does not allocate them to individual products.

3.    The bottleneck determines system output.
The constraint is the scarce resource—such as a machine, skilled worker, or process—that limits total production and sales. An hour lost at the bottleneck is an hour lost for the entire system.

4.    Products should be ranked by throughput per unit of bottleneck time.
Rather than choosing the product with the highest profit per unit, TA prioritizes the product that generates the most throughput per hour or minute of constrained resource.

5.    Improvement follows the five focusing steps.
Identify the bottleneck, exploit it fully, subordinate other activities to it, elevate or expand it if needed, and repeat once a new bottleneck emerges.

Simple calculation example

A company makes two products using one bottleneck machine with 1,000 machine hours available per month.

Item	Product A	Product B
Selling price per unit	$100	$80
Direct material cost per unit	$40	$20
Throughput per unit	$60	$60
Bottleneck hours per unit	2	1
Maximum monthly demand	300 units	800 units

Step 1: Calculate throughput per unit

Product A=100−40=$60 

Product B=80−20=$60

Both products have the same throughput per unit.

Step 2: Calculate throughput per bottleneck hour

Product A=602=$30 per bottleneck hour

Product B=601=$60 per bottleneck hour

Product B is more valuable because it creates twice as much throughput from each scarce machine hour.

Step 3: Rank and allocate bottleneck time

Produce Product B first, up to its demand:

800 units×1 hour=800

Remaining bottleneck hours:

1,000−800=200 hours

Use the remaining time for Product A:

200÷2=100 units of Product A

Step 4: Calculate total throughput

Product B=800×60=$48,000

Product A=100×60=$6,000

Total throughput=$54,000

If total factory costs are $30,000 per month, profit is:

$54,000−$30,000=$24,000

The key insight is that Product B should be prioritized despite having the same per-unit throughput, because it uses the bottleneck more efficiently.