Throughput Accounting

An emphasis on product costing is misplaced if the product in question is of poor quality, is delivered to the marketplace too late (speed of response) or lacks innovation in a rapidly changing market place. What possible use is there in knowing an accurate product cost if the product fails on any of the other three grounds outlined above? This question effectively places the relevance of product ‘cost accounting’ in a much broader ‘management accounting’ context that addresses product costing, accounting for quality, accounting for throughput and accounting for intellectual capital. In this short chapter, we concentrate on accounting for throughput (Dugdale and Jones 1996a), that is, the speed of response of a business entity to the market place and mostly from a manufacturing perspective. In this process, we start with the discussion of the method as proposed by Goldratt and Cox (1984), including the Theory of Constraints (TOC), and the later development by Galloway and Waldron (1988a, 1988b, 1989a, 1989b), including the Throughput Accounting ratio (TA ratio). Thereafter, we discuss how the management of production bottlenecks is carried out with the help of an illustrative case. In addition, a literature review is carried out, specifically, its evolution from the 1980s, with the aim of encouraging further academic research in this area.

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1. Tony Tollington