# Throughput Accounting

**URL:** https://kaizumi.com/dictionary/throughput-accounting

**Description:** Throughput Accounting is a TOC decision-making method that evaluates choices based on their impact on Throughput, Inventory, and Operating Expense.

**Category:** toc

**Tags:** metrics, foundational

## Definition

Throughput Accounting (TA) is a management accounting approach from Theory of Constraints that evaluates decisions based on three measures: Throughput (T)—the rate at which the system generates money through sales; Inventory (I)—money tied up in things intended for sale; and Operating Expense (OE)—money spent converting inventory into throughput. Good decisions increase T, decrease I, and decrease OE. TA prioritizes throughput over cost reduction, recognizing that profit comes from selling, not from cutting costs alone.

## Examples

### Manufacturing

> Traditional accounting rejected an order because product gross margin was "below standard." Throughput Accounting analysis showed: the order used only non-constraint capacity (no impact on other throughput), would generate $50,000 revenue with $15,000 truly variable costs = $35,000 throughput contribution. The order was accepted profitably.

### Healthcare

> A hospital evaluated adding evening OR hours. Traditional analysis focused on staffing cost. Throughput Accounting showed: additional surgical cases at full revenue with only incremental supply and overtime cost = significant throughput increase. The contribution far exceeded the incremental expense.

### Administrative

> A service firm considered outsourcing a support function. Traditional analysis showed cost savings. Throughput Accounting revealed: outsourcing would slow constraint-supporting activities, reducing throughput more than the cost savings. The function stayed in-house.

## Key Points

- Three measures: Throughput, Inventory, Operating Expense
- Good decisions increase T, decrease I, decrease OE (in that priority order)
- Throughput = Revenue minus truly variable costs (typically just materials)
- Challenges traditional cost allocation that hides constraint economics

## Common Misconceptions

**Throughput Accounting ignores costs.** TA tracks Operating Expense carefully—it just doesn't allocate OE to products. OE matters, but absorbing it into product costs creates false signals about which products generate profit.

**Throughput = Revenue.** Throughput is revenue minus truly variable costs—costs that change directly with each additional unit sold (usually just materials and outside processing). Labor and overhead are Operating Expense, not variable.

## Related Tool

Stack each operator's work elements against takt time to rebalance labor toward the throughput that drives the numbers — map the work content with the free [Yamazumi tool](/tools/yamazumi).

Source: https://kaizumi.com/dictionary/throughput-accounting
Licence: free to quote and cite with attribution to Kaizumi.