Throughput Accounting, Thomas Corbett, ISBN-13: 978-0884271581, is a book worth reading. People who are concerned with making good management decisions are the target audience, not only accountants. I found the underlying concept to be very interesting. It's clear that this approach to accounting should be superior to traditional cost accounting for manufacturing and transport businesses. With some adaptation it is probably better for other industries.
I read accounting theory books because accounting is a critical part of any information management and decision making system. The accounting theories specify how to summarize the millions of little bits of information from individual transactions and activities into forms used for decision making. Accounting is a crucial part of the information flow and feedback system. As illustrated in some of the examples in this book, inappropriate accounting theories lead to bad decisions. (This use is quite different from the regulatory demands that particular accounting methods be used for tax and other regulatory reasons. It's one reason that most companies have multiple sets of accounting books. An accounting system designed to compute taxes is rarely good for decision making.)
In throughput accounting the information gathering views the process flow of a business focusing in particular on choke points. This is in sharp contrast to the focus on cost allocation methods found in traditional accounting. Throughput accounting treats costs as a secondary rather than a primary factor. The production flow is primary, and one core element of analysis is understanding the impact that changes will have on production.
The simple example used to illustrate the difference between cost accounting is a simple factory with five stages. The product flow is simple, being stage 1 to stage 2 onward to stage 5. Stages 1, 2, 4, and 5 have capacities of 10, and stage 3 has a capacity of 1. Suppose you have two options available:
- Invest 500 to reduce the cost of production of stage 1 by 10%, or
- Invest 500 to increase the capacity of stage 3 by 100%, with no cost savings.
Traditional cost accounting shows option 1 to be worthwhile, and option 2 a bad investment. Throughput accounting shows option 1 to be a bad investment, and option 2 to be an excellent investment. The difference is that option 2 doubles capacity, allowing a doubling of production, thus doubling sales, thus increasing profits substantially. Option 1 does not change production and does not change possible sales. There is some possible savings even with static sales, but abandoning growth is usually part of an exit strategy. From an overall business point of view, throughput accounting makes better recommendations.
The book works through a variety of simple examples to illustrate commonplace issues. In real world systems the production systems will be much more complex but the same issues arise. The fundamental concept is to understand the process flows, identify the bottlenecks, and consider the impact of decisions on the production capacity of the system rather than allocate costs. You may choose to adjust product mixes, increase production, shift production when markets are saturated, etc. There is a lot here to think about.
The book does suffer from editorial problems. There are some serious typos in the examples, for example. Despite these, the basic concepts are made clear. This book is a slim inexpensive paperback that conveys the basic concepts. There are other much larger and more expensive books that look appropriate for accountants and managers who actually want to put this kind of system in place.
The Wikipedia article on Throughput Accounting is a decent enough summary, but the examples and discussion of the book help understanding a lot.