Throughput accounting

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Throughput accounting (TA) is a simplified, principle-based management accounting approach that provides managers with decision support information for improved corporate profitability. TA is relatively new in management accounting. This is an approach that identifies the factors that restrict the organization to achieve its objectives, and then focuses on simple steps that drive behavior in key areas to achieve organizational goals. TA is proposed by Eliyahu M. Goldratt as an alternative to traditional cost accounting. Thus, Accounting Throughput is not cost or cost accounting because it focuses on cash and does not allocate all costs (variable and fixed costs, including overhead costs) to products and services sold or provided by the company. Taking into account the law of variation, only costs that are completely different from the unit of output (see definition T below for TVC) eg. raw materials, allocated to products and services cut from sales to determine Throughput. Throughput Accounting is a management accounting technique used as a performance measure in Theory of Constraints (TOC). This is the business intelligence used to maximize profits, however, unlike cost accounting which mainly focuses on 'cutting costs' and reducing costs to generate profits, Accounting Throughput mainly focuses on generating more throughput. Conceptually, Throughput Accounting seeks to increase the speed or rate at which throughput (see definition T below) is generated by products and services with respect to organizational constraints, whether the constraints are internal or external to the organization. Throughput Accounting is the only accounting management methodology that considers constraints as a limiting factor for organizational performance.

Management accounting is a set of internal organization techniques and methods used to maximize shareholder wealth. Accounting Throughput is thus part of the management accountant's toolkit, ensuring the efficiency at which it matters and the overall effectiveness of the organization. This is an internal reporting tool. External or external parties for business rely on accounting reports prepared by financial accountants who apply General Accounting Principles (GAAP) issued by the Financial Accounting Standards Board (FASB) and enforceable by the US Securities and Exchange Commission (SEC) and regulatory bodies and other local and international bodies such as the International Financial Reporting Standards (IFRS).

Throughput Accounting improves earnings performance with better management decisions by using measurements that better reflect decision effects on three critical monetary variables (throughput, investment (AKA inventory), and operational costs - defined below).

Video Throughput accounting

Histori

When cost accounting was developed in the 1890s, labor was the largest part of the product cost and could be considered a variable cost. Workers often do not know how many hours they will work in a week when they report on Monday morning because the timing system is still not perfect. Accountant fees, therefore, concentrate on how efficiently managers use labor because it's their most important variable resource. But now, the workers who come to work on Monday morning almost always work 40 hours or more; their costs are fixed rather than variable. However, today, many managers are still being evaluated on the efficiency of their workforce, and many "downsizing," "blocking," and other labor-reduction campaigns are based on them.

Goldratt argues that, under current conditions, labor efficiency leads to adverse decisions rather than assisting the organization. Throughput Accounting, therefore, eliminates the dependence of standard cost accounting on efficiency in general, and labor efficiency in particular, from management practices. Many financial accountants and fees agree with Goldratt's criticism, but they have not yet agreed on their own replacement and there is enormous inertia in the installed base of people trained to work with existing practices.

Accounting constraints, which is a development in the field of Accounting Throughput, emphasizes the role of constraints, (referred to as Archemedian constraints) in decision making.

Maps Throughput accounting

Accounting Concepts Throughput

The Goldratt alternative begins with the idea that every organization has a purpose and a better decision to increase its value. The goal for a profit-maximizing company is expressed as, increasing net income now and in the future. Profit maximization seen from the perspective of Throughput Accounting, is about maximizing the profit mix system without the traditional allocation of Total Cost Accounting Costs. Throughput Accounting actions include obtaining maximum net income in the minimum time period, given the limited capacity and ability of resources. These resources include machinery, capital (self or loan), people, processes, technology, time, materials, markets, etc. Throughput. Accounting also applies to nonprofit organizations, where they develop their sensible goals in their individual cases. , and these goals are usually measured in target units.

Throughput Accounting also pays special attention to the concept of 'bottleneck' (referred to as constraints in Constraint Theory) in the manufacturing or service process.

Throughput Accounting uses three revenue and cost sizes:

• Throughput (T) is the rate at which the system generates "target unit." When the unit of destination is money (in a nonprofit business), throughput is net sales (S) less total variable cost (TVC), generally raw material cost (T = S - TVC). Note that T exists only when there are sales of products or services. Producing ingredients in the warehouse is not part of the proceeds but investment. ("Throughput" is sometimes referred to as the "contribution of throughput" and is similar to the concept of "contribution" in the marginal cost of sales revenue minus the "variable" - "variable" cost defined in accordance with the marginal cost philosophy.
• Investment (I) is money tied up in the system. This is money related to inventories, machinery, buildings, and other assets and liabilities. In the previous Theory of Constraints (TOC) document, "I" was exchanged between "inventory" and "investment." The preferred term is now simply "investment." Note that TOC recommends inventory to be rigorously assessed on the total variable cost associated with creating inventory, not with an additional cost allocation of overhead.
• Operating cost (OE) is the money the system generates in generating "target units". For physical products, OE is all costs except the cost of raw materials. OE includes maintenance, utilities, rent, taxes, and payroll.

Organizations that want to improve their achievement The Goal should therefore ask managers to test proposed decisions on three questions. Will the proposed changes:

1. Increase throughput? How to?
2. Reduce investment (inventory) (money that can not be used)? How to?
3. Reduce operating costs? How to?

The answers to these questions determine the effect of proposed changes on the measurement of a broad system:

1. Net profit (NP) = operating costs = T - OE
2. Return on investment (ROI) = net profit/investment = NP/I
3. TA Productivity = throughput/operating cost = T/OE
4. Changed investment (IT) = throughput/investment = T/I

The relationship between financial ratios as illustrated by Goldratt is very similar to the set of relations defined by DuPont and General Motors finance executive Donaldson Brown around 1920. Brown does not advocate changes in management accounting methods, but uses ratios to evaluate traditional financial accounting. data.

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Description

${\ displaystyle {\ text {Throughput}} = {\ text {Sales revenue - Total Variable Cost}}}$

${\ displaystyle {\ text {Throughput accounting Ratio}} = {\ text {Return by factory hour}}/{\ text {Factory hourly cost}} }$

For example: Railway trainer companies are offered contracts to make 15 open carriages every month, using designs that include brass fittings, but very little of the metal is required to produce closed train trainers. Buyers offer to pay $ 280 per tram. The company has a definite order for 40 train trainers each month of $ 350 per unit.

The cost accountant determines that the operating costs of metal casting vs. metal craft stores each month are as follows:

The company is at full capacity of making 40 train trainers every month. And since the foundry plant was expensive to operate, and buying brass as a raw material for expensive cars, the accountant decided that the company would lose money for every tramcar it built. He showed an analysis of product cost estimates based on standard cost accounting and recommended that companies refuse to build trams.

However, the company's operations manager knows that recent investments in automated casting equipment have created idle time for workers in the department. Constraints on railway production are metal craft shops. He makes a profit and loss analysis if the company takes a contract using throughput accounting to determine the profitability of a product by calculating "throughput" (revenue minus variable costs) in a metal shop.

After the presentation of the firm's accountant and operations manager, the president understood that the capacity of the metal store limits the company's profitability. The company can only make 40 train trainers per month. But by taking a contract for the tram, the company can make almost all train trainers ordered, and also meet all requests for trams. The result will increase throughput in metal stores from $ 6.25 to $ 10.38 per hour of available time, and increase profitability by 66 percent.

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Relevance

One of the most important aspects of Throughput Accounting is the relevance of the information it generates. Throughput Accounting reports what is currently happening in business functions such as operations, distribution and marketing. It does not depend entirely on GAAP financial accounting reports (which still need to be verified by external auditors) and thus relevant to current decisions made by management that affect business now and in the future. Throughput Accounting is used in Critical Chain Project Management (CCPM), Drum Buffer Rope (DBR) - in internally constrained businesses, in the Simplified Drum Buffer Rope (S-DBR) - in external constrained businesses (especially where lack of customer orders indicates constraints market), as well as in strategy, planning and tactics, etc.

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References

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External links

• Accounting Dictionary Via

Source of the article : Wikipedia