# Throughput

Pages: 12 (3824 words) Published: July 4, 2011
Strategic Cost Management

Throughput
Throughput is the quantity or amount of raw material processed within a given time, especially the work done by an electronic computer in a given period of time.
It is also known as the Productivity of a machine, procedure, process, or system over a unit period, expressed in a figure-of-merit or a term meaningful in the given context, such as output per hour, cash turnover, number of orders shipped.

In the business management theory of constraints, throughput is the rate at which a system achieves its goal. Often this is monetary revenue and is in contrast to output, which is inventory that may be sold or stored in a warehouse. In this case throughput is measured by revenue received (or not) at the point of sale—exactly the right time. Output that becomes part of the inventory in a warehouse may mislead investors or others about the organizations condition by inflating the apparent value of its assets. The Theory of Constraints and throughput accounting explicitly avoid that trap.

Throughput can be best described as the rate at which a system generates its products / services per unit of time. The ultimate goal of a business is to keep their customer satisfied. Businesses often measure their throughput using a mathematical equation known as Little's Law, which is related to inventories and process time: time to fully process a single product.

Using Little's Law, one can calculate throughput with the equation:
I = R * T,
where I is the number of units contained within the system, Inventory; T is the time it takes for a unit to go through the process, Flow Time; and R is the rate at which the process is delivering throughput, Flow Rate or Throughput. If you solve for R, you will get:

R = I / T

Throughput accounting
Throughput Accounting is a dynamic, integrated, principle-based, and comprehensive management accounting approach that provides managers with decision support information for enterprise optimization. TA is relatively new in management accounting. It is an approach that identifies factors that limit an organization from reaching its goal, and then focuses on simple measures that drive behavior in key areas towards reaching organizational goals. TA was proposed by Eliyahu M. Goldratt as an alternative to traditional cost accounting. As such, Throughput Accounting is neither cost accounting nor costing because it is cash focused and does not allocate all costs (variable and fixed expenses, including overheads) to products and services sold or provided by an enterprise. Considering the laws of variation, only costs that vary totally with units of output e.g. raw materials, are allocated to products and services which are deducted from sales to determine Throughput. Throughput Accounting is a management accounting technique used as the performance measures in the Theory of Constraints (TOC). It is the business intelligence used for maximizing profits, however, unlike cost accounting that primarily focuses on 'cutting costs' and reducing expenses to make a profit, Throughput Accounting primarily focuses on generating more throughput. Conceptually, Throughput Accounting seeks to increase the velocity or speed at which throughput is generated by products and services with respect to an organization's constraint, whether the constraint is internal or external to the organization. Throughput Accounting is the only management accounting methodology that considers constraints as factors limiting the performance of organizations.

Management accounting is an organization's internal set of techniques and methods used to maximize shareholder wealth. Throughput Accounting is thus part of the management accountants' toolkit, ensuring efficiency where it matters as well as the overall effectiveness of the whole organization. It is an internal reporting tool. Outside or external parties to a business depend on accounting reports prepared by financial (public)...