Throughput Accounting

Throughput Accounting is a different approach in management accounting as it treats only the direct material as the variable cost. All other cost is considered as the fixed cost. So, it means that profit can be improved only by reducing the fixed overheads. It revolves around the bottlenecks or scarce resources. As a result, all the focus is diverted towards improving the performance of the scarce resources. 

Theory of Constraint (TOC) is relevant here. According to this, an entity can produce as fast as its slowest department will allow it to be. This slowest department or process is often referred to as the 'bottleneck'. In order to improve the efficiency, all the focus is placed on improving the slowest process or department because by doing this, only profit can be improved and maximised.

Example Question

Alpha industry produces solar fans which have market demand of 100,000 units. The solar fans get manufactured through three phases of heating, molding and assembling. Time required in each process for each unit of the fan and the total hours available are as follows:

Process Heating Molding Assembling
Hours per Fan 1 2 3
Total Hours Available 100,000 180,000 320,000


Now, let's check would Alpha has sufficient capacity to produce 100,000 solar fans to meet market demand.

Process Heating Molding Assembling
Hours per Fan 1 2 3
Total Hours Required for 100,000 Fans 100,000 200,000 300,000
Hours Available 100,000 180,000 320,000
Shortfall in hours - 20,000 -


From above calculation, it is quite clear that Molding process is the bottleneck. This causes only the production of 90,000 units of solar fans.