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The modern business environment

Throughput accounting and the

Theory of constraints

Throughput = Sale Revenue less Direct Material Cost

Step 3: Step 4: Step 5: If a
Step 1: Step 2: How Subordinate
identify the to exploit the everything else Elevate the bottleneck has
system’s
been broken,
bottlenecks bottlenecks to the decision bottlenecks back to Step 1
in Step 2

Throughput per unit
Return per factory hour = –––––––––––––––––––––––––––––
Product time on bottleneck resource

This tells us how much return is generated
by each product at the bottleneck point.
Management should strive to maximise
this return (which should then lead to an
increase in the organisation’s profits).

Total factory costs
Cost per factory hour = –––––––––––––––––––––––––––––
Product time on bottleneck resource

Management should aim to minimise this
cost (which includes all other costs that
are not used in the calculation of
throughput contribution).

Return per factory hour
Throughput Accounting Ratio (TPAR) = –––––––––––––––––––––
Cost per factory hour

Management should aim to maximise this
measure. Typically, only products with a
TAR of greater than 1 (i.e. where the return
per hour is greater than the cost per hour)
should be produced.

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