Throughput accounting
1. What is throughput accounting
Major assumptions
• The only totally variable cost is direct raw materials costs.
• Direct Labor cost is not wholly variable.
• Inventory level should ideally be zero.
• Productions are for sales. Profitability is determined by the rate at which sales are made
• Idle time at non-bottleneck are acceptable.
To avoid the build-up of work in progress, production must be limited to the capacity of the bottleneck resource but this capacity must be fully utilised.
The overall aim of TOC is to maximise throughput.