## **Learning Outcomes**

After reading this article, you will be able to explain the principles of throughput accounting, identify and evaluate constraints (bottlenecks), calculate and interpret throughput accounting ratios, and apply throughput analysis to rank products for optimal resource allocation. You will also be able to analyse the management implications of resource constraints and recommend actions in exam scenarios.

## **ACCA Advanced Performance Management (APM) Syllabus**

For ACCA Advanced Performance Management (APM), you are required to understand throughput and constraint management as part of advanced performance measurement. Specifically, you should be able to:

- Explain the rationale behind throughput accounting as compared to traditional, absorption, and marginal costing approaches
- Identify bottlenecks or constraints and evaluate their impact on organisational performance
- Calculate throughput, throughput contribution, and the throughput accounting (TA) ratio for different products or services
- Apply throughput analysis to rank products and allocate scarce resources
- Interpret TA ratio results and recommend actions for improving performance
- Assess the advantages and limitations of throughput accounting for decision-making

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. When is a resource considered a bottleneck in throughput accounting, and why is it important?
2. How does throughput accounting treat costs differently from absorption and marginal costing?
3. A machine is available for 10,000 minutes per month. Two products require 15 and 25 minutes per unit, respectively. How would you rank the products for production if the machine is the constraint?
4. What does a throughput accounting (TA) ratio greater than 1 indicate about a product, and what would you recommend for ratios below 1?

## **Introduction**

Throughput accounting provides a focused approach to maximising organisational profit where capacity is limited by a bottleneck or constraint. Unlike traditional costing, which considers all costs in product profitability, throughput accounting concentrates on increasing throughput—the cash generated by sales after subtracting only the truly variable cost, direct materials. This methodology draws attention to constraints in the production process and guides managers to prioritise those activities that make best use of the limited resource. This article covers the steps for identifying constraints, calculating and interpreting throughput and TA ratios, and ranking products to maximise profit when resources are restricted.

> **Key Term: throughput accounting**
> A management accounting approach that focuses on maximising the cash contribution (throughput) generated by sales less direct material costs, particularly in the presence of a bottleneck or constraint.

## **Throughput Accounting and Bottlenecks**

Traditional costing systems often allocate all costs to products, but many fixed costs do not change in the short term with output levels. Throughput accounting separates direct material costs (viewed as truly variable) from all other costs, treating the latter as fixed in the short run. The technique highlights the impact of bottlenecks—resources whose limited capacity restricts output and, therefore, the organisation’s ability to generate cash.

> **Key Term: constraint (bottleneck)**
> Any resource whose limited capacity prevents the organisation from achieving higher output or sales, such as a particular machine, process, or skill set.

## **Identifying the Bottleneck**

The first step is to determine which resource constrains the throughput of the system. This could be a machine with limited available time, skilled labour in short supply, or a process step that cannot be sped up. Output of the whole system is limited by the capacity of this one constraint. Improving efficiency in non-bottleneck areas does not increase total throughput if the bottleneck remains unchanged.

### **Worked Example 1.1**

A company produces three products (A, B, C). All require time on Machine Y. The monthly available hours for Machine Y are 2,400. Other resources have spare capacity. How should the bottleneck be identified?

> **Answer:**
> Machine Y is the bottleneck because it has limited hours per month, restricting total production. The production plan should aim to make best use of Machine Y to maximise throughput.

## **Calculating Throughput and Throughput Contribution**

Throughput is defined as sales revenue minus direct material cost only. All other costs, including direct labour, are considered fixed in the short term. Focus shifts from profit per unit to throughput per unit of the bottleneck resource.

> **Key Term: throughput contribution**
> Sales value less direct material cost for a unit sold.

### **Worked Example 1.2**

Product D: selling price \$50, material cost \$18, requires 10 minutes on the bottleneck process per unit. Calculate throughput per minute.

> **Answer:**
> Throughput per unit = \$50 – \$18 = \$32  
> Throughput per bottleneck minute = \$32 / 10 = \$3.20 per minute

## **Product Ranking and Resource Allocation**

When a bottleneck exists, product ranking is based on which products generate the highest throughput per unit of the scarce resource, not per unit produced. This ensures that every available minute (or equivalent measure) of the constraint is used for the highest possible contribution.

### **Worked Example 1.3**

Product E: throughput per unit \$16, bottleneck use per unit 8 mins  
Product F: throughput per unit \$20, bottleneck use per unit 12 mins

Which should be prioritised?

> **Answer:**
> Product E: \$16/8 = \$2.00 per bottleneck min  
> Product F: \$20/12 ≈ \$1.67 per bottleneck min  
> Product E should be produced first as it uses the bottleneck resource more profitably.

## **Throughput Accounting Ratio (TA Ratio) Interpretation**

The throughput accounting ratio measures the efficiency of each product in using the bottleneck resource relative to its share of total factory operating costs. It is used to judge whether producing a product adds or destroys value.

> **Key Term: throughput accounting (TA) ratio**
> The ratio of throughput contribution per unit of bottleneck resource to total operating cost per unit of the bottleneck resource, used to assess the relative profitability of products.

The TA ratio is calculated as follows:

$$
\text{TA ratio} = \frac{\text{Throughput per unit of bottleneck resource}}{\text{Total operating cost per unit of bottleneck resource}}
$$

Where:

- Throughput per unit of bottleneck resource = throughput contribution per unit ÷ bottleneck usage per unit
- Total operating cost per unit of bottleneck = total factory operating costs ÷ total available units (e.g., minutes or hours) of bottleneck resource

A TA ratio above 1 means throughput contribution exceeds the associated share of operating costs, indicating profitable resource use. A ratio below 1 indicates the product is not covering its share of costs, alerting management to potential value destruction.

### **Worked Example 1.4**

Continuing from the previous example, suppose total operating costs (excluding materials) are \$72,000 per month and the bottleneck machine is available for 24,000 minutes. What is the TA ratio for Product E?

> **Answer:**
> Throughput per minute for Product E = \$2.00  
> Operating cost per minute = \$72,000 / 24,000 = \$3.00  
> TA ratio = \$2.00 / \$3.00 = 0.67  
> As the ratio is less than 1, each minute spent on Product E does not cover its share of operating cost. Management should consider reducing costs, increasing throughput, or switching to products with a higher TA ratio.

### **Exam Warning**

> When using throughput accounting, only direct material costs are considered variable. Including production labour or overhead as variable costs when calculating throughput will give incorrect results, since those costs are fixed in the short term for throughput analysis.

## **Summary**

Throughput accounting directs management attention to bottleneck resources and maximising the cash generated from every unit of the constraint. Products should be ranked by throughput per unit of the bottleneck, and the throughput accounting ratio used to assess whether each product is adding value for the organisation. The method provides clear guidance for resource allocation and performance improvements under constraint conditions.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Explain the role of throughput accounting compared to traditional costing approaches
- Identify bottleneck resources and their impact on organisational performance
- Calculate throughput contribution per unit of bottleneck and rank products accordingly
- Compute and interpret the throughput accounting (TA) ratio
- Analyse and recommend actions for products with low TA ratios
- Recognise when to apply throughput analysis in decision-making scenarios

## **Key Terms and Concepts**

- throughput accounting
- constraint (bottleneck)
- throughput contribution
- throughput accounting (TA) ratio

Throughput and constraint management - Throughput accounting ratio and product ranking