The Purpose of Management-Accounting Systems
The main goal of a management-accounting system is to provide guidance for daily decision-making. It stands to reason that if the assumptions the system is based on are correct, it will provide "good" information. But if those assumptions are wrong or no longer valid, managers will be forced to rely on nothing but their gut feelings or luck.
Unfortunately, over the last 30 years, globalization, pervasive technologies, and increasingly demanding customers have made our business environment more complex and competitive. This required an evolution that traditional systems—which were developed in the 1920s—failed to make. This paved the way for more modern systems like Activity-Based Costing, Lean Accounting, and Throughput Accounting.
The Throughput Accounting Approach
Constraint Management argues that an organization can be fully controlled day-to-day using three simple metrics:
- Throughput: The gross contribution margin, which is the difference between net sales and their variable costs.
- Investments: The value a company has "tied up" in anything it can resell, including raw materials, goods, and products, as well as plants, machinery, or land.
- Operating Expenses: The sum of everything spent to produce the throughput.
Using these three indicators, managers can evaluate all decisions—both "local" (related to a project, department, or single production line) and "global" (related to the organization as a whole system). This finally allows them to contribute meaningfully to the company's overall goal.