Throughput Accounting

Today’s post is by Randy Russon, founder of TOPCFOS

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In Steven Bragg’s book entitled, “Throughput Accounting: A guide to constraint management” he says, “The practice of throughput accounting is about how to wring more profits from your company by focusing strictly on the management of your bottleneck resource, or constraint. This approach is entirely at odds with the traditional use of detailed allocations to arrive at fully burdened costs for your products, customers, and sales regions – which can yield results so convoluted that a company can become paralyzed with indecision. Not so with throughput accounting, which yields crisp and easy to understand results for a broad range of management applications.” Today I simply want to focus on throughput accounting as it applies in a manufacturing environment.

This new approach to accounting called throughput accounting focuses on where the bottleneck lies in a production facility. A manufacturer with complex manufacturing processes wants to produce as many units as possible at the least possible cost. When looking at all of these manufacturing processes, throughput accounting focuses on where the bottleneck lies. Let’s say that your firm produces widgets that requires 7 manufacturing processes. When looking at how many units can be produced per hour at each stage of the manufacturing process, let’s say that it ranges from 100 units per hour on the low end to 300 units per hour on the high end. In this scenario, the bottleneck is at the manufacturing process where only 100 units per hour can be produced.

Even though other manufacturing processes can produce up to 300 units per hour, it makes no sense to run units at this capacity when the bottleneck can only produce 100 units per hour. So, all other manufacturing processes should be scaled back to the rate of the bottleneck of 100 units per hour. Then, the focus should be on how to increase the output of the bottleneck. This might require new machinery or different ways of configuring the manufacturing process to increase output. The entire factory is limited by this one bottleneck, so all resources should be focused on how to increase output. This short article was meant to simply open the door to this whole new world of throughput accounting. TOP CFOS entire mission is that of creating shareholder value for our clients, and we use throughput accounting as one more tool to accomplish this end.

We hope you’ve enjoyed our Blog today. Please remember, TOP CFOS offers the finest CFO services to companies anywhere in the world and would love to be a part of your team. Feel free to reach out to us anytime. Your feedback is most welcome, and we invite you to share this post with friends and associates. During the month of August, we are offering a free service to our readers. We will help you set up your COA (Chart of Accounts) according to GAAP, all at no charge. Our contact information can easily be found here on our website, so give us a call today! Our next post will come from the Government category on our website and is entitled The Burden of Government Regulation. And, thank you for joining us!