Throughput accounting. Costing methods, Activity Based Costing (ABC), however a little amount of concentration has been provided towards the constraints and problems being faced by organizations. History has witnessed that the performance of organizations is largely challenged by the constraints and these are the factors that have really potential to influence the performance of the organizations.
Thanks to the theory of throughput accounting that has largely focused to constraints being faced by organizations. Constraints could be a policy, a material constraint, time constraint and so on. By focusing on the different aspects of cost and performance of organizations, throughput accounting has become successful in attracting the attention of number of multinational organizations. In the subsequent parts of this paper, first theory of throughput accounting is defined and its basic foundations have also been discussed.
Subsequent to that, steps involved in throughput accounting have also been elaborated and it is followed by the part comprising of the inherent limitations being faced by this concept. Before the summary part, analysis portion has been included.
Hutchinson (2007) defines throughput as the rate at which the system generates money through sales (48). And throughput accounting has been defined as the sales price minus all variable costs (Noreen et al. 1995). And others define throughput as sale prices minus material cost. And, the concept of throughput accounting based on two components:
First, every system must have at least one constraint (Rahman, 1998, p. 337). If it were not accurate, then a real system as a profit making organization would make uncountable profits. As a result, a constraint is anything limiting a system from achieving higher level of performance versus its objectives (Glodratt, 1988, p.453). Second, the presence of constraints provides opportunities for improvement (Rahman, 1988, p.337).