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Summary of Throughput Accounting

Throughput accounting differs from traditional product costing in several key ways. Throughput accounting focuses on value being added when an item is sold, rather than when it is produced. It prioritizes meeting delivery dates over full utilization of resources. Variance analysis examines why the scheduled mix was not produced, rather than if standards were achieved. Labor and overhead costs are generally not treated as variable costs. Inventory is valued based on material costs only in the balance sheet. Throughput accounting has been successfully applied not just in manufacturing but also in service industries to speed up processes and reduce costs.

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Eduardo Great
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136 views2 pages

Summary of Throughput Accounting

Throughput accounting differs from traditional product costing in several key ways. Throughput accounting focuses on value being added when an item is sold, rather than when it is produced. It prioritizes meeting delivery dates over full utilization of resources. Variance analysis examines why the scheduled mix was not produced, rather than if standards were achieved. Labor and overhead costs are generally not treated as variable costs. Inventory is valued based on material costs only in the balance sheet. Throughput accounting has been successfully applied not just in manufacturing but also in service industries to speed up processes and reduce costs.

Uploaded by

Eduardo Great
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Summaryofthroughputaccounting

ThetableshownherehighlightsthedifferencebetweenTAandtraditionalproduct
costing.

Differencebetweenthroughputaccountingandtraditionalproductcostsystems

Throughputaccounting Traditionalproductcosting
Valueisaddedwhenanitemissold Valueisaddedwhenanitemisproduced
Scheduleadherenceandmeeting Fullutilisationoflabourandmachine
deliverydatesarethekeytoworking timeisthekeytoworkingefficiently
effectively
Varianceanalysisonlyinvestigateswhy Varianceanalysisinvestigateswhether
thescheduledmixwasnotproduced standardswereachieved
Labourandtraditionallydefinedvariable Labourandtraditionallydefinedvariable
overheadsarenotnormallytreatedas overheadsaretreatedasvariablecosts
variablecosts
StockisvaluedintheP&Landbalance StockisvaluedintheP&Landbalance
sheetatmaterialcostonly(i.e.variable sheetattotalproductioncost
cost)

SofarTAhasonlybeenconsideredinrelationtomanufacturingorganisationsbutit
hasbeenusedverysuccessfullyinserviceindustriesaswell.Forexample,ithas
beenusedtospeedupandreducecostsincheckingcustomerscreditworthiness.

Inonecompanythisprocesstookalongtime,oftenlongerthanaweek,andheldup
furtheractivities.
BeforeTAwasused,overqualifiedpeoplewereusedtomakebasiccredit
decisionsandthiscausedthedelaysindecidingoncreditworthiness.
Afterwardsordinarymembersofstaffwereallowedtomakedecisionsinthe
majorityofcasesandonlydifficultoneswerereferredtoexperts.Thismeant
thatdecisionsweremademuchfaster,normallywithin24hours,andthecost
ofthefunctionwasreduced.

TAhasbeencriticisedforbeingundulyshorttermbecauseallcostsapartfrom
materialcoststendtobetreatedasfixed.Itcouldbearguedthattheuseof
traditionalmarginalcostingisnotalwayscorrectbecausethosethatuseittendto
treatdirectlabourasavariablecost,whichisnotrealistic.Itcouldbeargued,and
hasbeenbysome,thatlabourismorefixedthananitemofmachineryandits
associatedcosts,asthatcanberemovedandsoldwithinafewweeks.Staffcannot
bemaderedundantasquicklyandthecostmaybegreater.Havingsaidthat,inthe
longtermallcostsarevariableandalloptionspossiblebutTAonlyconsidersthe
currentsituationandwaysofimprovingit.

Marginalcostingandthroughputaccountingrelyonthecalculationofcontribution
(sales=variablecost)andassuchthereisnodifferencebetweenthem.Because
directlabourwaspaidonapiecerate,itwaslargelyatrulyvariablecostwhen
marginalcostingwasdevelopedearlythiscentury.Today,textbookstendtousethe
samedefinitionofvariablecostsformarginalcostingpurposeseventhoughitis
usuallynolongerrelevant.Oncethisproblemhasbeenovercomethetwosystems
areseentobethesameinprinciple,marginalcostingdealingwithshorttermone
offdecisionsandthroughputaccountingprovidingaplanningandcontrolsystem.

Makeorbuydecisionsshouldnearlyalwaysbemadefromastrategicviewpointand
notfromashorttermmarginalcostpointofview.Butassumeforamomentthata
shorttermdecisionisneededandmarginalcostingisused,andthatitsuggeststhat
theproductunderconsiderationshouldbemaderatherthanboughtin.Ifthis
productusesvaluablecapacityonthemachinebeforethebottleneckmachine,then
theholdingofbufferstockcouldbejeopardisedundercertaincircumstances.

ThiswasarealscenarioatAlliedSignalLtd.Becausethroughputaccountingwas
used,managementdeclinedtheopportunitytomaketheproductunder
consideration(Darlington,1995).Againconflictoccurredbetweenthetwosystems,
buttheconsequenceofusingsparecapacityshouldhavebeenconsideredinany
systemthroughputaccountingsimplydrewattentiontoit.

Itisalsoarguedthatbyconcentratingontherelationshipbetweensalesand
materialsTAneglectsothercosts.ThisisnotavalidcriticismastheTAratio
incorporatesconversioncostspertimeperiod.Howeverthepurposeofthroughput
accounting,andespeciallyTOC,isnotsomuchtocontrolcostsastodemonstrate
waysofimprovingprofitbyincreasingproductionflow.Itisanattentiondirecting
system.Thecriticismscanbecounteredbutneverthelessthroughputaccountingis
notatechniquethatwillsuitallorga

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