Throughput and Abc Accounting

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The Differences Between Throughput Accounting and Activity-Based Costing Kristin White North Carolina State University Kristin White Paul Williams ACC 310H-004 13 December 2011 The Weakest Link Throughput accounting is a management accounting approach that seeks to maximize throughput. Throughput is defined as “the contribution margin left after a product’s price is reduced by the amount of its totally variable costs (Bragg, 2001, p. 174). The thing that distinguishes throughput accounting apart is that it factors in constraints that affect an organization’s performance. Activity-based costing (ABC) is used to identify activities within an organization and assign costs to each of these activities. This way ABC will reduce costs and allocate resource costs to services and products. By doing this, more overhead costs are assigned to direct costs. The significant difference between throughput accounting and activity-based costing is what each methodology defines as productivity (Corbett, 1998, p. 108). “TOC is concerned with the system as a whole, it is concerned with aligning local decisions with the global goal” (Corbett, 1998, p. 108). Another major difference between throughput accounting and activity-based costing is found in the statement Corbett (1998) made about cost accounting methods, “if we want a good overall performance for the system all we need to do is optimize the various links of the system” (p. 109). As for the Theory of Constraints, Corbett (1998) states, “that local optima do not lead to global optimum” (p. 109). This means that it will not be very efficient for a system to optimize all of its links in a chain (Corbett, 1998, p. 109). Throughput Accounting An Israeli physicist named Eliyahu M. Goldratt (Noreen, Smith, Mackey, 1995, p. 1) developed the Theory of Constraints (TOC) in 1984. He wrote a book titled The Goal.

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