In this series, I will explain different accounting systems that can be used to maximize profitability within your company. Beginning with Part 1, I will reference a book entitled Throughput Accounting Techniques, written by Etienne Du Plooy(1). If you haven’t yet read this book, I highly recommend it.
From cost accounting to throughput accounting
Making decisions in organizations is an ongoing element of managing change, affecting both short-term and long-term planning horizons. Most decisions today are controlled by cost accounting information, which naturally results in actions that are cost-focused.
So, why this emphasis? The reason is because it’s an overwhelming worldwide paradigm. Cost accounting is what is taught for decision making all over the world. Because it is what we learned in school, it is what we know. Therefore, it often appears to be the only way to make decisions. But cost accounting is not the only choice available for companies. In fact, throughput accounting is available and it offers solutions for making smarter and more relevant decisions in real-time.
Throughput accounting enhances decision making because it improves cost accounting solutions. Cost accounting information is not in the least considered obsolete or irrelevant, because it is appropriately necessary, just as is throughput accounting information. Both are indispensable, because success is dependent on income and cost-related decisions. In this series, I will explore the reasons why these two forms of accounting are both relevant and, in fact, should be used together.
A very brief accounting history
During the early 1900s, Western accounting started its development of management accounting. Today, the two main branches of accounting are financial accounting and management accounting. Henry Ford’s Ford Motor Company is said to have been a pioneer of the first standard costing method. This was a cost accounting approach that is still being used by management accountants today.
Throughput accounting, on the other hand, was first introduced to the world in 1984 by Eliyahu M. Goldratt and Jeff Cox in their popular business novel, The Goal(2). Since the publication of this book, throughput accounting has received attention from organizations wishing to improve their performance, but it has largely remained a tool used primarily by Theory of Constraints consultants as they work to improve their clients’ performance. In comparison to other management accounting approaches, throughput accounting’s popularity appears to be low and there seems to be a massive gap between throughput accounting’s potential and its practice. Because of the possibilities associated with throughput accounting, this shouldn’t be the case, but unfortunately it is. It is my strong belief that the primary reason for the low interest level in throughput accounting is that the Theory of Constraints has been ignored by many companies. I hope that this series will generate more interest in this accounting methodology.
In my next post, I will continue our discussion on accounting methods and look at some of the various types of constraints that exist within many companies which can significantly impact their profitability.
Until next time,
(1) Throughput Accounting Techniques, Etienne Du Plooy, General Media Press, Garsfontein, South Africa, 2016
(2) The Goal, A Process of Ongoing Improvement, Eliyahu M. Goldratt and Jeff Cox, North River Press, Great Barrington, Massachusetts, 5th edition, 2014
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