Is this your cost accountant?<\/figcaption><\/figure>\nObscures the real picture<\/strong>
\nPerhaps the biggest problem with cost accounting is it does the opposite of what it sets out to do – make decisions easier. The allocation of overhead, local optimization and the over-valuation of inventory make it difficult to see what is really happening in a company. Worse, it hides how to make improvements.
\n <\/strong><\/p>\nThere is a much better way<\/strong>
\nFortunately there is a simpler and much better way to measure company performance. It is called Throughput Accounting.<\/p>\n <\/strong>Throughput accounting<\/strong>
\nThe first notable thing about this method is how simple it is. Instead of learning the rules of cost allocation, WIP and internal scorecards, there are only three measurements.
\n <\/strong><\/p>\nThroughput<\/strong>
\nThroughput is by far the most important measurement of throughput accounting. It is defined as sales minus true variable costs at the constraint of the business. True variable costs are things such as raw materials, freight, packaging etc. It does not include labour and other expenses that don\u2019t track with throughput. The important part of the definition is throughput through the constraint of the business. This means if you increase throughput, the business will improve. There is nothing simpler than that.
\n <\/strong><\/p>\nExpenses<\/strong>
\nExpenses are all other costs to the company. Overhead, interest, depreciation, labour are all expenses. Throughput accounting doesn\u2019t waste effort on finding little boxes to allocate costs. This isn\u2019t nearly as important as throughput because there is a definite top level of cost performance – zero costs. If you meet this goal, it means you are out of business.
\n <\/strong><\/p>\nInvestment<\/strong>
\nInvestment represents how much cash the firm has tied up to operate. This is inventory, equipment and other fixed assets. It is treated as something necessary to support the business, not something with its own inherent value. The main advantage to this is it leads business managers to keep enough inventory to support throughput, but eliminate everything else. This way they avoid problems like shrinkage, obsolescence and problems when high cost WIP is finally sold.<\/p>\nBased on real world<\/strong>
\nThe real beauty of throughput accounting is it takes advantage of the information available today to provide real guidance. If a manager makes an improvement in any of the three categories, the results will be apparent on the income statement, balance sheet and cash flow statement. The results are real and unambiguous. If you use this system properly, decisions will become easier and your success rate will increase dramatically.<\/p>\nI have only introduced the concept here. For more information there are two excellent books. Throughput Accounting by Thomas Corbett<\/a> and Throughput Accounting – a guide to constraint management by Steven M. Bragg<\/a> explain the concept and prove effectiveness with lots of examples. If you are struggling with your cost accounting system or want to improve your processes, these are must-reads.<\/p>\n","protected":false},"excerpt":{"rendered":"This quote comes from Thomas Corbett\u2019s book \u201cThroughput Accounting.\u201d Corbett quoted this from the godfather of Theory of Constraints (TOC), Dr. Eliyahu M. Goldratt. This is a bold statement but is true. Cost accountants and business managers are not stupid, so how can this be? This blog explores these questions and proposes a solution. Why…<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[27,1],"tags":[40,39,16],"class_list":["post-492","post","type-post","status-publish","format-standard","hentry","category-business-solutions","category-uncategorized","tag-cost-accounting","tag-goldratt","tag-toc"],"_links":{"self":[{"href":"https:\/\/www.abonarconsultants.com\/blog\/wp-json\/wp\/v2\/posts\/492","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.abonarconsultants.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.abonarconsultants.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.abonarconsultants.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.abonarconsultants.com\/blog\/wp-json\/wp\/v2\/comments?post=492"}],"version-history":[{"count":0,"href":"https:\/\/www.abonarconsultants.com\/blog\/wp-json\/wp\/v2\/posts\/492\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.abonarconsultants.com\/blog\/wp-json\/wp\/v2\/media?parent=492"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.abonarconsultants.com\/blog\/wp-json\/wp\/v2\/categories?post=492"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.abonarconsultants.com\/blog\/wp-json\/wp\/v2\/tags?post=492"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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