Author(s): Suaad Jassem
Managers in manufacturing organizations rely on accurate information from accounting practices to take real-time decisions in order to maximize profitability from their product-mix or across business units. All the existing cost accounting approaches rely on allocating costs of labour and overheads across business-units or product-lines or individual products. The practice of allocating indirect cost is rarely precise, and therefore opens up the possibility of distorted information being placed to managerial decision-makers leading to wrong decisions.
Throughput accounting, which is a result of Goldratt’s Theory of Constraints, offers a simple and viable alternative to the distortions created by cost accounting approaches. Throughput accounting suggests a paradigm shift in analysing contribution of product-mix and business units by changing focus of managers from emphasizing on managing cost-per-unit to managing throughputs. This study presents a conceptual discourse with hypothetical illustrations on the distortions created by cost accounting and how throughput accounting removes such distortions and presents factual information to decision-makers.