Throughput accounting is introduced in F5 paper, it is a system of cost and management accounting which is mainly designed for use in a just in time manufacturing environment. Throughput contribution is defined as sales revenue minus material cost, it is assumed that only material cost is variable in short term, whereas labor cost as well as most factory overheads are fixed. Throughput is maximized by maximizing selling price and saleable output, minimizing material costs.
Throughput accounting entails the identification and elimination of these bottleneck resources, usually reflects on removing the restriction in output caused by process’s capacity , it could be solved by working overtime, making process improvements and changing product specification. Elimination of one bottleneck may result in another bottleneck emerging elsewhere.
One limitation of throughput accounting is paying too little attention to overhead costs, however, the problem could be alleviated by introducing an activity based costing (ABC) system.
Throughput accounting ratio=Throughput contribution per factory hour÷Conversion cost per factory hour=[(Sales price－Material cost)÷Bottleneck resources]÷[(Labor cost＋Variable production overhead＋Fixed production overhead) ÷Factory hours]
In order to improve the throughput accounting ratio of one product, the following ways should be taken into consideration, as follows:
1. Increasing the selling price
2. Increasing the speed of the process
3. Reducing material costs
4. Reducing factory costs