APPLICATION OF THROUGHPUT ACCOUNTING IN NIGERIA IMPORT AND EXPORT INDUSTRIES

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Throughput Accounting (TA) is a principle-based and simplified management accounting approach that provides managers with decision support information for enterprise profitability improvement (Wikipedia, 2015). TA is relatively new in management accounting. It is an approach that identifies factors that limit an organization from reaching its goal, and then focuses on simple measures that drive behavior in key areas towards reaching organizational goals. TA was proposed by Eliyahu M. Goldratt as an alternative to traditional cost accounting. As such, Throughput Accounting is neither cost accounting nor costing because it is cash focused and does not allocate all costs (variable and fixed expenses, including overheads) to products and services sold or provided by an enterprise (Eliyahu, Goldratt & Cox, 2013). Considering the laws of variation, only costs that vary totally with units of output e.g. raw materials, are allocated to products and services which are deducted from sales to determine Throughput. Throughput Accounting is a management accounting technique used as the performance measure in the Theory of Constraints (TOC).

It is the business intelligence used for maximizing profits, however, unlike cost accounting that primarily focuses on ‘cutting costs’ and reducing expenses to make a profit, Throughput Accounting primarily focuses on generating more throughput (Corbett, 2014). Conceptually, Throughput Accounting seeks to increase the speed or rate at which throughput is generated by products and services with respect to an organization’s constraint, whether the constraint is internal or external to the organization. Throughput Accounting is the only management accounting methodology that considers constraints as factors limiting the performance of organizations (Noreen, 2009). When cost accounting was developed in the 1890s, labor was the largest fraction of product cost and could be considered a variable cost. Workers often did not know how many hours they would work in a week when they reported on Monday morning because time-keeping systems were rudimentary. Cost accountants, therefore, concentrated on how efficiently managers used labor since it was their most important variable resource. Now however, workers who come to work on Monday morning almost always work 40 hours or more; their cost is fixed rather than variable