Throughput Accounting Software

Definition: Throughput accounting is a method by which an enterprise can quantifiably measure the efficiency of its profit maximisation process by analysing the throughput, investment and operating expense of its organisation.


Throughput Accounting Software

Concept of Throughput accounting

The basic objective of for-profit enterprises is simply to maximise revenue while minimising expenditure – essentially, to maximise its Return on Investment (ROI). Throughput accounting offers a method by which an enterprise can track the efficiency of their profit maximising process, offering decision makers a valuable tool by which to adapt the strategy of the enterprise.

Throughput accounting measures the performance of a profit maximising process by focusing on three variables of income and expense: throughput, investment and operating expense.

For the purposes of this illustration it will be taken as read that the enterprise in question is a for-profit organisation centred on the manufacture and sale of a tangible deliverable.

* Throughput (T)

Throughput is the rate at which an enterprise produces ‘goal units’. In this case a goal unit is profit, so throughout is sales revenue minus the cost of the raw materials used to manufacture the product.

* Investment (I)

Investment is the value of all funds tied up in the system. In the example of a manufacturing process, investment includes the cost of existing inventory, machinery, factory buildings and warehouses along with any other assets and liabilities.

* Operating Expense (OE)

Operating expense is the term given to all expenditures that vary according to the quantity of goods produced, including maintenance, taxes, payroll and rent.

Objectives of Throughput Accounting Software

Once these three variables have been identified they can be used by throughput accounting software to generate the three measures used to aid management in decision making:

* Net Profit = Throughput – Operating Expense

* Return on Investment (ROI) = Net profit/Investment

* Productivity = Throughput/Investment

Clearly, the objective of any enterprise will be to maximise these three values by minimising expenditures. Management can use these values to help make decisions on strategy by predicting the effects their decisions would have on the overall throughput, investment and operating expense for the enterprise.

In making these decisions it is important that management ask themselves these basic questions:

* How Can We Increase Throughput?

* How Can We Reduce Investment?

* How Can We Reduce Operating Expense?

Value of Throughput Accounting Software

The primary objective of any decision-maker involved in the design of a manufacturing process is to enable the process to work on a just-in-time (JIT) basis. Essentially that means that the manufacturing schedule is optimised so that deliverable goods and services are manufactured only in such quantities as to meet current demand, with the minimum possible wastage of resources and inventory.

Clearly, then, the objective of throughput accounting software is to allow managers the tools necessary to design such processes.

To achieve this end, throughput accounting software offers decision makers the reporting tools necessary to answer ‘what if’ questions related to the apportion of resources at any stage in the manufacturing process. For example, what would be the effect on throughput if we downsized the manufacturing workforce by 5%? Would that action increase or decrease net profit for the enterprise?

Throughput Accounting and the Theory of Constraints

Most importantly, throughput accounting uses concepts developed by the Theory of Constraints to identify constraints (also known as bottlenecks) in the manufacturing process in an effort to allow managers to optimise the manufacturing process.

A bottleneck could, for example, occur at a certain point during the assembly of a product. If investment (in machinery) and operating expense (in payroll for workforce) is too low at a certain point in the manufacturing process then a bottleneck will form, stifling throughput.

The Theory of Constraints tells us that resources must be applied to the bottleneck in order to remove it.

Throughput accounting software, then, offers managers the opportunity to predict the effect of such an action on the system. Would an increase in investment at the bottleneck be justified by an increased return on investment, or would throughput not substantially increase? These answers would allow decision-makers to appropriately apportion resources to best utilise them in the creation of profit.