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Goldratt, E. M. 1992. From cost world to throughput world. Advances In Management Accounting (1): 35-53.

Outline by Brenda Okulski
Master of Accountancy Program
University of South Florida, Fall 2000

Theory of Constraints Main Page | Deming Main Page

Purpose: To determine the cause of the paradigm shift to a "new overall management philosophy" in the late 1980’s.

What actually happened in the 80s?

A 2nd industrial revolution occurred with three new major movements (TQM, JIT, TOC, and

A "renaissance" of industrial management thought.

What is new in those "new overall management philosophies"?

Main Aspects of an Organization:

Goals - the goal is still to make money (TQM & JIT emphasize serving the client).

Measurements - TQM adds non-financial measurements; JIT- considers cost measurements a problem; TOC - crusades against cost measurements.

Conclusion: All three movements clash with traditional methods and measurements!

Challenges to Traditional Methods:

Inventory – TOC allowed for no "value added" by the system; TQM unaware of need for new definition; JIT was aware and saw inventory as a liability; on Balance Sheet still reported it as an asset.

Sales - Should be registered when transaction takes place with end consumer; TQM-too much inventory in pipeline not good; JIT & TOC silent on this aspect.

Background: Debates Around Cost Accounting:

Inherent flaw - allocations are based on direct labor hours.

Arbitrary allocation bases (machine time), still there were distortions.

Logical bases (ABC) using cost drivers were time consuming, data intensive & complex; separate systems went against "one goal…one company…one system" belief.

Conflict occurs when you try to evaluate bottom line (T-OE=NP).

Throughput product based Operating expenses entities based.

Solution - change OE to products based, ABC tries but ends up with too many levels.

Purpose of Cost Accounting - to make business decisions (e.g., launch new product?).

If all resources available in excess-no analysis required.

Analysis and decision needed only if any resource is limited…a constraint in the system.

Accounting should be constraints based, not product based.

Relationships of Measurements to One Another.

Conventional scale - (product based).

Operating expense - tangible to management, can be quantified by cost accounting.

Throughput - intangible (can’t assign numerical value), ignored by cost accounting.

Investment - traditionally least important.

New scale (constraints based).

Throughput - not inherently limited.

Investment - directly impacts ROI and indirectly impacts OE and future T. Operating expense – close third.

How many new philosophies emerged - three or just one?

All three movements relate to a company’s actions through the new scale.

TQM - improving product quality is a means to improving the quality of the organization.

JIT - stresses that inventory reduction is more important than cost savings.

TOC - stresses increasing throughput by managing constraints.

Conclusion:

Only one philosophy based on the importance of throughput rather than cost.

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Related summaries:

Corbett, T. 2000. Throughput accounting and activity-based costing: The driving factors behind each methodology. Journal of Cost Management (January/February): 37-45. (Summary).

Goldratt, E. M. 1990. What is this thing called Theory of Constraints. New York: North River Press. (Summary).

Goldratt, E. M. 1990. The Haystack Syndrome: Sifting Information Out of the Data Ocean. New York: North River Press. (Summary).

Goldratt, E. M. 1992. From Cost world to throughput world. Advances In Management Accounting (1): 35-53. (Summary).

Goldratt, E. M. and J. Cox. 1986. The Goal: A Process of Ongoing Improvement. New York: North River Press. (Summary).

Goldratt, E. M., E. Schragenheim and C. A. Ptak. 2000. Necessary But Not Sufficient. New York: North River Press. (Summary).

Hall, R., N. P. Galambos, and M. Karlsson. 1997. Constraint-based profitability analysis: Stepping beyond the Theory of Constraints. Journal of Cost Management (July/August): 6-10. (Summary).

Louderback, J. And J. W. Patterson. 1996. Theory of constraints versus traditional management accounting. Accounting Education 1(2): 189-196. (Summary).

Luther, R. and B. O’Donovan. 1998. Cost-volume-profit analysis and the theory of constraints. Journal of Cost Management (September/October): 16-21. (Summary).

Martin, J. R. Not dated. Comparing Dupont's ROI with Goldratt's ROI. Management And Accounting Web. https://maaw.info/ComparingDupontGoldrattROI.htm

Martin, J. R. Not dated. Comparing Traditional Costing, ABC, JIT, and TOC.  Management And Accounting Web. https://maaw.info/TradABCJITTOC.htm

Martin, J. R. Not dated. Drum-Buffer-Rope System. Management And Accounting Web. https://maaw.info/DrumBufferRope.htm

Martin, J. R. Not dated. Global measurements of the theory of constraints. Management And Accounting Web. https://maaw.info/TOCMeasurements.htm

Martin, J. R. Not dated. Goldratt's dice game or match bowl experiment. Management And Accounting Web. https://maaw.info/MatchBowlExperiment.htm

Martin, J. R. Not dated. TOC problems and introduction to linear programming.  Management And Accounting Web. https://maaw.info/TOCProblemsIntroToLP.htm

Rezaee, Z. and R. C. Elmore. 1997. Synchronous manufacturing: Putting the goal to work. Journal of Cost Management (March/April): 6-15. (Summary).

Ruhl, J. M. 1996. An introduction to the theory of constraints. Journal of Cost Management (Summer): 43-48. (Summary).

Ruhl, J. M. 1997. The Theory of Constraints within a cost management framework. Journal of Cost Management (November/December): 16-24. (TOC Illustration).

Westra, D., M. L. Srikanth and M. Kane. 1996. Measuring operational performance in a throughput world. Management Accounting (April): 41-47. (Summary).

Yahya-Zadeh, M. 1999. Integrating long-run strategic decisions into the theory of constraints. Journal of Cost Management (January/February): 11-19. (Summary).