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.
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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.
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