Throughput is the rate at which the system generates money. It is similar to Gross Margin or Contribution Margin, but it is also different in that TOC (Theory of Constraints) does not consider direct labor as a variable cost, but rather as Operating Expense.
The role of the company’s constraint is fundamental for quantifying the decision’s impact on the three measurements. Thus, to identify which products contribute the most to the company’s net profit, TOC advocates the use of the measurement of “Throughput per time of the constraint”. This method is much simpler than costing methods. It allows for fast decisions that are directly linked to the bottom line.
Next month we will explore Throughput Accounting in more depth, and explain how implementing its concepts will help you understand the rate at which your company makes money. We will also discuss how Throughput Accounting affects pricing decisions.
If you’d like to be better prepared for the discussion, we recommend one or more of the following books:
- The Haystack Syndrome by Dr. Goldratt,
- The Theory of Constraints and Its Implications for Management Accounting by Noreen, Smith, and Mackay, and
- Throughput Accounting by Corbett.
You can also search this blog for Throughput Accounting.
…to be continued.
Here’s to maximizing YOUR profits!
Dr Lisa Lang