Purpose:  To demonstrate that a change in accounting method can be a move to a simpler costing model. Changing to a more complex system may not be the best decision since it may not be cost effective or timely. The system should be able to respond quickly to the changing needs of managers.

A Case in Throughput Accounting

Bertch Cabinet Manufacturing, Inc. is an integrated manufacturer of wood cabinets and accessories. Bertch has eight divisions within the company.  Between 1991 and 1993 Bertch experimented with ABC in two of their eight divisions. This was Bertch’s first attempt at a formal costing system.  The management team at Bertch was pleased with the initial results of the pilot study.  The ABC information was used to help price glass products, assess long-term profitability of mirror and cultured marble products, evaluate labor efficiency and manage the costs of non-value added activities.  Bertch had planned to expand the ABC system into all divisions of the company.  However, their efforts to further develop ABC were not successful 

Activity Based Costing (ABC) has been supported as superior to conventional costing for product costing and long-run pricing. However, ABC requires additional data collection resources that can be very costly. These additional costs may not be cost effective for small and medium sized businesses. More traditional costing systems may be accurate enough for the managers of these smaller organizations. ABC was not a cost effective decision for Bertch.  The costs of developing and running a complex ABC system were greater than the benefit that would be derived from implementing such a system. 

Another reason that Bertch's ABC implementation was not successful was the system's inability to generate timely responses to purchase offers for semi-custom offers.  Usually the merchandisers require swift acceptance of these offers.

Bertch was not a candidate for ABC due to their ever changing production technologies.  It would be impossible for the company to update their ABC system for frequent technology and process change.

In February 1993 Bertch implemented synchronous manufacturing.  Sixty days after implementation managers saw improvements. Synchronous manufacturing helped to increase sales revenue and profits. To support the new synchronous manufacturing, management implemented throughput accounting. Under throughput accounting there are three global operational measures used to replace current costing systems. They are throughput (the rate at which the system generates money through sales) inventory (all of the money the system invests in purchasing things the system intends to sell) and operating expenses (all of the money the system spends turning the inventory into throughput). Under throughput accounting the products to be emphasized are those with the highest throughput per unit of the scarce resource. 

Throughput is defined as “selling price less direct materials cost, which include payments to external parties for raw materials, components, subcontracted work, salespersons’ commissions, transportation, and custom duties” (36).

Example:

Wood product X generates a throughput of $100 and requires 10 minutes on the bottleneck machine.

Throughput per minute = 100/10

Throughput per minute = 10

Wood product Y generates a throughput of $150 and requires 20 minutes on the bottleneck machine. 

Throughput per minute = 150/20

Throughput per minute = 7.5

All other things being equal, Wood Product X should be emphasized because it produces the higher throughput per machine minute at the bottleneck resource.

Throughput accounting was designed to supply basic costing information to managers in a synchronous manufacturing environment. Birtch uses a variation of throughput by adding 70% of direct labor to materials costs, i.e., throughput is calculated as sales price less direct materials and 70% of direct labor costs. Their view is that 70% of direct labor costs is truly variable. This approach eliminates detailed costing entries that are generally associated with traditional cost systems. Birtch uses its variation of throughput accounting information for:

        product pricing decisions, although many of their product prices are set by the market,
        establishing bids on new contracts,
        product mix decisions based on throughput per constraint resource, and
        evaluating the company's divisions and products based on throughput margin.

The primary purpose of a management accounting system is to satisfy the needs of managers within the organization. Bertch did just that. They have given management a resource that will provide value-added information allowing them to make informed business decisions.

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