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More than a system of improvement, ToC proposes a new way of accounting for purchases and expenses. Based always on the philosophy of constraint, this method of counting calls into question the known principles.

The basic principle

To implement a continuous improvement process, it takes 2 conditions1 :

  • Define the purpose of the organization.
  • Identify the performance indicators that will enable it to reach it.

The shareholders, as business owners, define the objective as follows: “making money now and in the future“. TOC’s interest in accounting is based on the fact that management accounting practices have stagnated since the years 1920 and that traditional management accounting, based on calculations of the costs of products or services, is no longer Relevant to assess the effects of local actions and must evolve. They have been designed to support mass production methods and are struggling to adapt to the new business environment2.

GOLDRATT goes further by declaring that ” accounting is the enemy of productivity3.

Definition of terms

The Throughput

Translated by sales throughput, it is the ability of the system to generate money through sales. It is calculated by deducting from the total amount of sales actually delivered and invoiced (turnover – T), consumptions totally proportional (CCV) to sales (prices of raw materials, transport, subcontracting…).

Throughput = T-CCV


Translated by Stock, these are all the means that the system has invested to produce. In a more accountable way, the inventory includes:

  • All fixed Assets: construction, machinery, fittings…
  • All stocks: material, outstanding production, finished products

Operating expenses

Translated by operating costs, it is all the expenditure to transform the stocks into Throughput other than the CCV: personnel costs, taxes and taxes, depreciations…

The associated indicators

Net Profit = Throughput – Operating expenses

Return on investment = Net Profit/Inventory

Productivity = Throughput/Operating expenses

Cash flow = Throughput – Operating expenses-Inventory

Throughput Accounting and traditional accounting methods

In the ” classic ” Accounting, we find 3 models that we compare in the table below with the model of Throughput accounting.

Full cost Direct Cost Activity based costing (ABC) Throughput Accounting (TA)
Origin It was developed from the 18th century until the financial crisis of the 1920s. Elaborated in the mid-years 50 by the National Association of accountants Created and developed by Kaplan and Johnson in the years 19903. End of the years 80 by Goldratt.
Context Sales of homogeneous products by mass. We are working on production capacity and not on market demand. Increase in the share of indirect fixed charges in companies. A product is the result of a custom assembly of standard subsets to satisfy increasingly specific customer segments. Evolution of operational methods without counterparties in management accounting.
Approach Analytical approach on the costs of each operation and the efficiency of each unit of work. Indirect charges require prior calculations to know their destination.

Take into account only part of the costs in the cost of the products. Each product is judged on its contribution to the coverage of direct charges.

The variable loads are collected in one or more suitably selected masses.

It is the legacy of the historical approach to full cost.

The company is cut in process and the cost is calculated based on the consumption of these processes that allowed them to realize the products.

Systemic approach – the impact of decisions on the objectives of the systems.
Founding principle

Traceability of costs.

Causality of production volume and resource volume consumed.

Optimization of the use of an existing capacity. Build an Analytical Accounting system to adapt to an automated and integrated environment.

The performance of any system is limited by one or more constraints.

Financial indicators are aligned with operational management.

Basic hypothesis

The overall optimum is obtained by the sum of the local optimums.

The price of the product is calculated on the basis of cost (incorporating direct and indirect costs).

Indirect charges do not affect the cost of the product.

The overall optimum is obtained by the sum of the local optimums.

The price is calculated on the basis of cost (incorporating direct and indirect costs).

The optimum of the system is not obtained by the sum of the local optimums. The price is determined by the market. The organization is no longer cut in process.
Priority Cost reduction Increase in volumes Cost reduction Increase of Throughput

Accounting speaking, here is a table showing the differences in calculating the balance sheet of a company4 :

Full cost and ABC

Direct costing Conventional

Throughput Accounting




-Direct sales costs (DSC)

-Variable costs (includes labor costs)

-Completely variable costs (materials, trade commissions, transport)

= Gross margin

= Marginal Contribution

= Throughput

-Indirect Charges -Fixed costs -Operating expenses

= Operating Result

4 basic assumptions of the models of traditional accounting are challenged by the model of Goldratt5 :

  • a limited role in calculating costs for pricing: Traditional accounting methods start with costing to determine the price of the product. On the other hand, the ToC shares the market price. Only the completely variable loads are distributed on the products, the others being charged to the costs of the period.
  • a refusal of organizational cutting: Traditional methods adopt an analytical approach that treats the functions of an organization independently. Since TA is based on a systemic approach that favours the optimum exploitation of a constraint, it refuses the organization’s cutting into sub-parties to allocate non-fully variable costs.
  • a refusal of the linearity of the short-term costs: The full cost method and ABC consider that an increase in the volume of activity mechanically induces an increase in indirect loads. The costs (direct and indirect) then vary in a linear manner depending on the level of activity. TA emphasizes that only completely variable costs vary directly with the activity level, while the other costs do not vary in the short term, as long as the production volume does not exceed a certain threshold.
  • the priority of global performance to focus on continuous improvement: For traditional methods postulates that the overall optimum is obtained by the sum of the local optima. This is tantamount to considering that an improvement in a unit of the organization has a positive impact on the whole organization. On the contrary, TOC considers that the sum of the local Optima does not produce the overall optimum. Only the improvements that affect the constraint of the system being studied participate in the overall performance increases of the organizations.


TA appears to be a short-term approach to making decisions. The interest of TA lies precisely in the short-term priority to facilitate the decision of the operational: The TA is openly focused on the short term and fortunately since the standard accounting does not care, and an organization must exist in the short term6. »

The decision-making consequences

Depending on the type of accounting chosen, the work priorities and operational decisions will be different. Here is a summary table of these differences:

Order of Precedence Full cost and ABC Direct Costing and Throughput accounting
1 Decrease spending Increase the Throughput
2 Increase the Throughput Reduce investment
3 Reduce investment Decrease spending

This order of precedence comes from the fact that theInventory and theoperating expenses are limited (what do we do once the operating expenses have been reduced and optimized? What happens once the inventory has been defatted?). The Throughput has a potential for progression that is not limited, “Even the sky is not the limit” said Goldratt.

The managerial consequences

Traditional approaches are based on an appreciation of individual and local performance in relation to the organization’s analytical cutting that leads to individualistic behaviour. An operational entity is considered effective when it achieves its specific objective.

By focusing on the overall effectiveness of the Organization, TOC challenges these individualisantes approaches to the collective performance of the Organization. Each is subordinate to the constraint and if the system has been able to suppress the constraint, all the teams are thanked.


1 – E. M. Goldratt (1990) – The Haystack syndrome: sifting information out of The date ocean

2 – T. H. Johnson, R.S. Kaplan (1991) – Relevance lost, the rise and fall of management accounting

3 – R. S. Kaplan, A.A. Atkinson (l989)-Advanced Management Accounting

4-E. Noreen, D. Smith, T. Mackey (1995)-The Theory of constraints and its implications for management accounting

5 – B. H. Maskell, B. Baggaley-(2003)-Practical Lean accounting: A proven System for measuring and Managing the lean Enterprise

6 – D. Waldron-(1994)-Research Interview


C. Drury (2008) – Management and cost accounting

D. Magdalene, T. Colwyn Jones (1998) – Throughput Accounting: Transforming practices

W. J. Hopp, M. L. Spearman (2011)-Factory Physics

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