This post is, once again, taken from my newest book,

*Theory of Constraints, Lean, and Six Sigma Improvement Methodology – Making the Case for Integration*. Specifically, the material for this series is taken from Chapter 5 entitled,*A Better Way to Measure a System’s Success*. As I explained in my last post, readers that are totally familiar with the Theory of Constraints might find this series a bit basic, but I’m writing this series for those who are not totally familiar with the Theory of Constraints.
Let’s now look at this same company using Throughput
Accounting (TA) and see if the results tell us the same things or not as
described in the table below. TA
provides an entirely different perspective when looking at this business and
its potential product mix.

TA ranks product profitability according to Throughput
on the constraint per minute (T/CU/t).
In addition, it does not allocate Operating Expense (OE) to
products. So, based upon this, Product A
yields $4 per minute on the constraint, Product B yields $4.17, and Product C
yields $4.44. TA says the priority should
be to produce as much of Product C as capacity will allow, then Product B, then
Product A (the exact opposite priority of CA).
Because Step 2 is the system constraint, producing 100 units of Product
C, 100 of Product B, and 20 of Product A is all that can be done. With this product mix from Throughput
Accounting, instead of a $250 loss when using Cost Accounting, this business
generates a net profit of $200. The only
difference being the product mix!

[1] Effective use of Throughput Accounting requires
different information than from Cost Accounting, so new report formats must be
implemented. For example, a Throughput
Accounting earnings statement shows T, I, and OE relative to the constraint,
while conventional Cost Accounting reports are oblivious to the
constraint. Just as CA and TA rank
product profitability differently, they may also rank customer profitability
quite differently. Several Throughput
Accounting outcomes are noteworthy:

- Financial
measures reverse management priorities from OE, T and I (for Cost Accounting)
to T, I, and OE (for Throughput Accounting).

- Performance
measures for Throughput Accounting are not distorted by cost allocations for
Cost Accounting.

- Constraint
measures eliminate conflict between local measures (machine utilization or
operator efficiency) and global measures (performance of the business).

- Control
measures remove the incentive to build excess inventory and replace it with the
incentive to deliver products on time.

In my next post, we
will review the primary components of Throughput Accounting, starting with
Throughput. As you will see, Throughput
at your Company is achieved by processing parts, selling or delivering them to
customers and receiving payment for all goods you sold.