Management And Accounting Web

MacArthur, J. B. 1996. From activity-based costing to throughput accounting. Management Accounting (April): 30, 34, 36-38.

Summary by Lisa Anderson
Master of Accountancy Program
University of South Florida, Summer 2003

ABC Main Page | TOC Main Page

The purpose of this paper is 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 includes payments to external parties for raw materials, components, subcontracted work, salespersons’ commissions, transportation, and custom duties” (36).


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:

1. product pricing decisions, although many of their product prices are set by the market,
2. establishing bids on new contracts,
3. product mix decisions based on throughput per constraint resource, and
4. 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.


Related summaries:

Baxendale, S. J. and P. S. Raju. 2004. Using ABC to enhance throughput accounting: A strategic perspective. Cost Management (January/February): 31-38. (Summary).

Campbell, R. J. 1995. Steeling time with ABC or TOC. Management Accounting (January): 31-36. (Summary).

Campbell, R., P. Brewer and T. Mills. 1997. Designing an information system using activity-based costing and the theory of constraints. Journal of Cost Management (January/February): 16-25. (Summary).

Coate, C. J. and K. J. Frey. 1999. Integrating ABC, TOC, and financial reporting. Journal of Cost Management (July/August): 22-27. (Summary).

Corbett, T. 2000. Throughput accounting and activity-based costing: The driving factors behind each methodology. Journal of Cost Management (January/February): 37-45. (Summary). (According to Corbett, the underlying assumptions of ABC and TOC are the exact opposites and accountants cannot agree with both).

Demmy, S. and J. Talbott. 1998. Improve internal reporting with ABC and TOC. Management Accounting (November): 18-20, 22 and 24. (Summary).

Goldratt, E. M. 1990. What is this thing called Theory of Constraints. New York: North River Press. (Summary). (In Chapter 4 Goldratt says that the word "cost" is a dangerous and confusing multi-meaning word and that the word "product cost" is "an artificial, mathematical phantom" p. 49).

Goldratt, E. M. 1990. The Haystack Syndrome: Sifting Information Out of the Data Ocean. New York: North River Press. (Summary). (In Chapter 7 Goldratt tells us that the business world today has changed and cost accounting has been slow to react. They have not reexamined the fundamentals, the financial statement logic, to create new solutions. Instead, they have formulated ineffective answers like “cost drivers” and “activity-based costing.” We can no longer allocate based on direct labor. So allocating expenses at the unit level, batch level, group level, and company level is meaningless. These cannot be aggregated at their respective levels nor at the top. So why do it?).

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

Holmen, J. S. 1995. ABC vs. TOC: Its a matter of time. Management Accounting (January): 37-40. (Summary).

Huang, L. 1999. The integration of activity-based costing and the theory of constraints. Journal of Cost Management (November/December): 21-27. (Summary).

MacArthur, J. B. 1993. Theory of constraints and activity-based costing: Friends or foes? Journal of Cost Management (Summer): 50-56. (Summary).

Martin, J. R. Not dated. Chapter 7: Activity Based Product Costing. Management Accounting: Concepts, Techniques & Controversial Issues. Management And Accounting Web.

Martin, J. R. Not dated. Chapter 8: Just-In-Time, Theory of Constraints, and Activity Based Management Concepts and Techniques. Management Accounting: Concepts, Techniques & Controversial Issues. Management And Accounting Web.

Martin, J. R. Not dated. Comparing Dupont's ROI with Goldratt's ROI. Management And Accounting Web.

Martin, J. R. Not dated. Comparing Traditional Costing, ABC, JIT, and TOC. Management And Accounting Web.

Martin, J. R. Not dated. Drum-Buffer-Rope System. Management And Accounting Web.

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Martin, J. R. Not dated. Goldratt's dice game or match bowl experiment. Management And Accounting Web.

Martin, J. R. Not dated. TOC problems and introduction to linear programming. Management And Accounting Web.

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).