Monday, December 28, 2020

Throughput accounting: pushback

Whenever I write about or talk about 'throughput accounting' I get pushback.

Fair enough.

You won't find such accounting in your Accounting 101 textbook, except perhaps in a chapter dedicated to cost accounting wherein the concept of 'variable cost' is discussed.

But 'variable cost' doesn't quite capture the concept:
'Throughput' is the stuff that gets through to end-users, beneficiaries, or customers that they can apply to whatever it is they do. 
Accounting for what it takes to produce 'throughput' is the essence of 'throughput accounting'
  • First, of course, is 'variable cost': If you have to buy a gallon of paint to put the finishing touch on 'throughput', then the cost of the paint is 'variable' to your day-to-day expenses, and the cost of the paint is directly part of the cost of 'throughput'.
  • But second, you might reallocate resources from day-to-day 'running the business' to specifically and directly produce the throughput. If such is reallocated, then add that to the cost of throughput.
What about the day-to-day?
But, many ask, what about all the day-to-day stuff to make possible the environment and capabilities and capacity to affect throughput. Shouldn't there be some "ABC" of those costs? (*)
  • My answer is: no. But ....
  • Yes, you can try that. But, be prepared for endless arguments about allocations which in-and-of-themselves add no value. 
  • And be prepared to 'de-conflict' allocation overlaps such that the sum of the ABC costs does not exceed the sum of the actual business expenses, to wit, by example: a manager's cost is allocated to several projects in an ABC sense. Then it's discovered that the sum of all the manager's allocation exceed the actual cost of the manager. Back to the allocation drawing board!
What about revenue?
Does 'throughput' have to generate new revenue in order to be 'throughput'?
Back to the definition: the users or beneficiaries may not be revenue customers. So, there's no direct tie of throughput to revenue.
What about 'value'?
Does throughput have to make the business more valuable ... in effect, increase the size of the balance sheet? 
Value is consequence of throughput, but in many instances the value which is consequential to throughput can not be directly monetized. Such is the case for many non-profits and government agencies. Yes, they have balance sheets; but no, those balance sheets don't accumulate the consequences of their activities like a for-profit business' balance sheet does.

It's complicated
Yes, but ....
Throughput' is the stuff that gets through to end-users, beneficiaries, or customers that they can apply to whatever it is they do.
(*) Activity-based costing (ABC) is a method of assigning overhead and indirect costs—such as salaries and utilities—to products and services. The ABC system of cost accounting is based on activities, which are considered any event, unit of work, or task with a specific goal.

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