Throughput Accounting

Thomas Corbett sets out the accounting approach derived from Eliyahu Goldratt's theory of constraints, and argues that conventional cost accounting produces decisions that damage the business.

The framework uses three measures. Throughput is the rate at which the system generates money through sales, calculated as revenue minus totally variable costs, which in most manufacturing means materials only. Inventory or investment is the money tied up in things the system intends to sell. Operating expense is all the money spent turning inventory into throughput, which includes labour and overhead, treated as period costs rather than allocated to products.

The key move is refusing to allocate labour and overhead to units. Corbett argues that this allocation, which conventional cost accounting requires, produces a product cost that is an artefact of the allocation base and that decisions made from it, including which products to discontinue, whether to accept a special order and whether to make or buy, are systematically wrong. Under throughput accounting the correct decision rule is to maximise throughput per unit of the constraint, since the constraint determines the system's output. He works through examples showing conventional and throughput analysis reaching opposite conclusions. The approach is genuinely clarifying for constrained manufacturing operations. Its limitation is that it assumes a single identifiable constraint and that operating expenses are fixed, neither of which holds over longer horizons or in businesses with substantial variable overhead.