Throughput accounting is a production management philosophy introduced by M. Goldratt. According to throughput theory, managing the business with a view to maximize profit is not only ignoring the much important variables (like customers demands, needs and affordability) but also push the organizations towards inter-departmental conflicts.
According to throughput accounting, management should be concentrating on maximizing cash flows instead of maximization of profits. And this does make sense that profits can be maximized by increasing the price or quantity sold but one major thing ignored in “profit maximization” methodology is that no answer is given regarding the tangible translation of profits i.e. cash. Unless we do not realize the profits in cash form, then all the theoretical profits and feasibility reports have no value at all. Thus, management should work towards maximization of sales, which will prove generation of cash and thus indirectly increasing the profits.
Throughput philosophy cannot be termed as a costing technique as it is not providing a new way of cost classification and accumulation for any of the three major elements of cost i.e. direct material, direct labour and overheads. Therefore, it is termed as throughput accounting instead of throughput costing.
