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Choosing the most suitable management technique for your purposes | Throughput Accounting

This is the first of two articles designed to help you make sense of the appropriate use of the many different techniques you need to learn in your Cost and Management Accounting studies. The subject of this first article is Throughput Accounting. 

The number and diversity of the techniques can be confusing. In many cases they can even seem to be contradictory. The simple answer to the confusion is to think of the saying ‘Horses for Courses’. In other words different management decisions and functions require information and data that is tailored to their specific needs. A simple illustration of this could be that if you are looking to find a particular street in a city you would not use a map of the world.  

Everybody has heard of absorption costing, for example, but for many businesses its use can be quite limited. In some situations it can only be used for stock valuation or, possibly, for quoting prices for one-off jobs. One technique which seems to contradict many other techniques is Throughput Accounting. This technique assumes that the only variable cost is material. All other costs are considered to be fixed. This can be particularly confusing when you consider that Activity Based Costing, in effect, considers all costs to be variable. 

The most effective use of Throughput Accounting seems to be in the elimination of bottlenecks, or pinch-points as they are sometimes called. It helps management to focus on throughput and can provide information that reduces the effect of those bottlenecks.   The technique uses measures such as ‘the Return per factory hour’, where return is Sales less material costs. There are several formulae associated with this technique and you find examples in your recommended reading. You can, of course, adapt these formulae for use in different situations, not just factories.