Managers often find themselves facing problems where the solution is not obvious. A tool designed for analyzing these complex questions is throughput accounting (TA), as Corbett describes in the article “Three-Questions Accounting.” TA requires you to determine how a decision will impact throughput, operating expense, and investment. The relationship among these factors can help you determine if a decision will improve profitability. Think of how TA could affect your organization or one with which you are familiar. Think of a decision at the organization you chose and the effect the decision has had on the organization’s throughput and operating expenses. Also consider the decision’s effect on the amount of money invested in operations, such as people, processes, software, infrastructure, and current projects. If you are not familiar with an organization in this situation or if you are restricted by confidentiality requirements, select a different organization. You can research organizations in the business press. Prepare the following: ~ A brief description of the organization you selected and the decision this organization made ~ A description of the impact that the decision had on investments in operations, such as people, processes, software, infrastructure, and current projects ~Your determination of whether the organization made the correct decision, based on your application of the principles of throughput accounting (Justify your response.) References: Aghili, S. (2011). Throughput Metrics Meet Six Sigma. Management Accounting Quarterly, 12(3), 12-17. Albright, T., Lam, M. (2006). Managerial Accounting and Continuous Improvement Initiatives: A Retrospective and Framework. Journal of Managerial Issues, 18(2), 157-74. Corbett, T. (2006). Three-questions accounting. Strategic Finance, 87(10), 48–55
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Managerial Accounting and Continuous Improvement Initiatives: A Retrospective and Framework
Albright, Tom;Lam, Marco
Journal of Managerial Issues; Summer 2006; 18, 2; ProQuest Central
pg. 157
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Three-Questions Accounting
Corbett, Thomas
Strategic Finance; Apr 2006; 87, 10; ProQuest Central
pg. 48
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Throughput Metrics
Spring Meet
2011
Six Sigma
VOL.12 NO.3
BY SHAUN AGHILI, CMA, CIA, CISA, DBA
THROUGHPUT ACCOUNTING (TA)
DMAIC
METRICS CAN BE COMBINED WITH
SIX SIGMA’S
METHODOLOGY AND VARIOUS TIME-TESTED ANALYSIS AND MEASUREMENT
TOOLS FOR ADDED EFFECTIVENESS IN RESOLVING RESOURCE CONSTRAINT ISSUES.
THE
GOAL IS TO OPTIMIZE NOT ONLY THE OUTPUT OF A SPECIFIC DEPARTMENT
BUT THAT OF THE ENTIRE SYSTEM—BY IMPLEMENTING A COST ACCOUNTING SYSTEM THAT
IS CONDUCIVE TO SYSTEM OPTIMIZATION WHILE INCREASING PRODUCT
QUALITY, PROCESS INTEGRITY, OR, IDEALLY, BOTH.
ix Sigma and the Theory of Constraints
(TOC) are arguably the two most significant
methodologies affecting operation management and process improvement initiatives
over the past three decades. For those of
you who have forgotten the concept behind it, TOC is
a simple, yet brilliant management theory introduced
by Eliyahu M. Goldratt in his 1984 book, The Goal. This
unusual book, written in the form of a hard-to-putdown novel about a plant manager named Alex Rogo,
depicted how TOC can be used to increase productivity
and operating income in a manufacturing setting by
stepping away from practices suggested by traditional
cost accounting and variance reporting systems.
Six Sigma approaches some of the same TOC issues,
but from a different angle. The focus of Six Sigma is to
address issues related to the Cost of Poor Quality
(COPQ). Looking at it from a traditional quality theory
point of view, Six Sigma aims at decreasing internal and
external failure costs in an enterprise, thereby contributing directly to increased customer satisfaction.
Having spent several years studying Six Sigma and
some of its implications for management accounting
and internal auditing, I began to contemplate the benefits of incorporating TOC accounting metrics within the
control phase of Six Sigma.
As such, the purpose of this article is to provide
management accountants with a dual conceptual
framework—merging elements from Goldratt’s Theory
of Constraints with Six Sigma’s DMAIC methodology
S
M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY
12
SPRING 2011, VOL. 12, NO. 3
and tools—that can be used to tackle organizational system constraints. Specifically, I will aim to:
◆ Provide you with an overview of Six Sigma, as well
as the fundamentals of TOC and Throughput
Accounting (TA);
◆ Propose a Six Sigma/TOC dual framework that
allows a system constraint to be broken up quickly
(TOC effect) while the Six Sigma approach studies
the issue in more depth to also address effects related to COPQ. In other words, while TOC can target
the resource constraint (tactical objective), the Six
Sigma methodology aims to increase the level of
quality and remove extra nonvalue-added processes,
thereby freeing up additional system resources.
◆ Explain why the use of TA metrics within the
proposed framework presented in this article can
help address several shortcomings associated with
other cost accounting systems, such as traditional
cost accounting (CA), as well as the more relevant
activity-based costing (ABC).
A SIX SIGMA
AND
er, The Lean Six Sigma Pocket Toolbook, can be used best as
a Six Sigma dictionary and quick reference guide in
choosing appropriate tools to tackle a certain task. I also
encourage you—especially if you are an internal audit
professional—to read a previous article of mine, “A Six
Sigma Approach to Internal Audits,” which appeared in
the February 2009 issue of Strategic Finance, in order to
gain an overall understanding of how the DMAIC
methodology may be used to better orchestrate an operational internal audit. Although some Six Sigma senior
project managers (“black belts” and “master black
belts”) caution organizations against a premature and illplanned launch of Six Sigma, certain of its methodologies
and tools can be implemented effectively on a projectby-project basis as long as the internal process improvement or audit team has received an adequate level of Six
Sigma training and is supervised by a black belt.
P U T T I N G G O L D R AT T ’ S T H E O R Y
WORK
Most people who are a
(Certified Management
Accountant) have a good understanding of TOC. The
central idea behind it is simple enough: Every business
system is limited by its constraints; therefore, to increase
the output of the system, these constraints have to be
eliminated, or at least “elevated,” as Goldratt put it. As
such, he presented four steps to his theory:
(1) Identify the constraint. The first step in this
methodology is to find the weak link—the cause of the
problem. Anything within a system that has a substantial work-in-process inventory (more than the amount
needed to provide an adequate safety cushion) in front
of it is often suggestive of a constraint. Sometimes a
process contains several constraints causing its
decreased productivity, in which case the greatest constraint ought to be addressed first before moving to
other, less important ones.
TO C P R I M E R
Six Sigma is a quality-driven, scientific methodology
that aims at improving a current standard to a future,
ideal standard of 99.9997% accuracy. This translates to
about 3.4 defects per one million opportunities. Six
Sigma is based on the DMAIC (Define, Measure,
Analyze, Improve, Control) methodology. The main
strength of Six Sigma is that it is data driven: The
DMAIC process contains an arsenal of more than 400
process improvement and analysis tools—many of
which have been used for more than a half century.
The roots of Six Sigma can be traced back to the PlanDo-Check-Act cycle developed by W. Edwards Deming in the 1950s to help Japanese businesses rebuild
their infrastructure after World War II.
Even though a detailed discussion of Six Sigma is outside the scope of this article, management accountants
interested in becoming more familiar with the Six Sigma
methodology are encouraged to add the following two
books to their office shelves. The first, The Six Sigma
Handbook by Thomas Pyzdek, is used in many Six Sigma
certification courses and provides the novice and intermediate Six Sigma practitioner with a comprehensive,
detailed overview of the DMAIC methodology. The oth-
M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY
TO
CMA®
(2) Determine how to exploit the system’s constraint(s).
The main idea behind this step is to study the constraint and improve it so that none of its scarce
resources is wasted. Another important concept here is
to prioritize various jobs within the constraint in such a
way that the jobs with the highest contribution margins
(in the case of a manufacturing process) or the highest
priority (in the case of a service process) are tended to
first. Throughput Accounting metrics make this task
13
SPRING 2011, VOL. 12, NO. 3
easy for the management accountant.
to as assets or investments in TOC literature) is defined
as the money invested in things intended for sale.
Finally, operating expense is defined as all the money
spent on turning investments into throughput. Note,
too, that TA’s emphasis is on variable costs and does not
even treat direct labor as a fixed cost since a business
should have the ability to adjust its workforce depending on market demands. Because TOC emphasizes
variable costs as the only truly relevant costs for
decision-making purposes, TA has been referred to by
some as a type of “super-variable” cost accounting.
The basic TA accounting equation increases throughput (T) while it simultaneously decreases both inventories (I) and operational expenses (OE), leading to
optimal decision making. Four metrics of particular use
in TA are:
(1) Operating Profit Before Tax and Interest
(Net Profit or NP) = Throughput (T) –
Operational Expense (OE)
(2) Return on Investment (ROI) = Net Profit
(NP)/ Inventory (I)
(3) Productivity (P) = T/OE
(4) Inventory Turns (I) : T/I
(3) Subordinate everything else to the above decision.
Assuming only one main constraint in a process, there is
no reason to maintain flow that is larger than what the
constraint can handle effectively. This very often may
free up other resources (equipment, manpower, and the
like) in other parts of the process chain that may be
used to crank up the output of the main constraint to
make sure that it is working to its fullest capacity (see
step 4). In other words, all nonconstraint processes
should aim to support the constraint instead of focusing
on localized cost minimization incentives. This concept
is illustrated effectively in Goldratt’s DBR (Drum, Beat,
Rope) concept where the constraint sets the beat (pace)
for the entire system.
(4) Elevate the system’s resources. This step involves
increasing the capacity of the constraint. This can be
accomplished by: (a) shifting resources from other parts
of the system, as discussed in the previous step,
because the constraint is setting the pace of the whole
system and may cause other parts of it to have spare
capacity that may be transferable and/or (b) employing
outside resources, such as additional manpower, outside
shops, and purchase or reuse of old equipment.
Finally, once the constraint is broken, inertia should
not be allowed to set in: An immutable law of system
management is that a system will always gravitate
toward the creation of a new constraint. One of the reasons behind this phenomenon is that there is always a
“next weakest link” poised to replace a previous constraint that has been broken. As a matter of fact, it is
quite possible for a system to have several minor constraints ready to become the next major constraint.
Furthermore, because we are dealing with a constrained system, the constraint measures may be set up
as follows:
(1) Throughput per Constraint Unit (T/CU) =
(Revenue – Totally Variable Costs)/Units
(2) Constraint Utilization (U) = Actual Production
Time/Available Production Time
As such, the way TA goes about maximizing throughput is by making the best use of the previously mentioned system constraint because each hour lost on the
constraint represents, in essence, an hour of lost productivity for the entire operation. The T/CU data is also
used for various optimization decisions, such as whether
to continue or discontinue a product line, thereby
increasing the capacity of the constraint on a long-term
basis by purchasing improved equipment, hiring additional workers, or adjusting the price of a product. Any
such decisions will result in a change in net profit,
defined as a change in throughput minus a change in
operating expenses. Consequently, the payback of the
TA : “ S U P E R – V A R I A B L E ”
CO ST AC CO U N T I N G ?
The above framework has lent itself to a newer set of
cost accounting metrics referred to as Throughput
Accounting, which focuses on the most missed element
of all other traditional and more contemporary cost
accounting approaches: throughput. Specifically, TA
centers around three financial measures: throughput
(T), inventory (I), and operating expense (OE).
Throughput is defined as the rate at which a system
generates money through sales. Inventory (also referred
M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY
14
SPRING 2011, VOL. 12, NO. 3
new decision can be expressed by the resulting change
in net profit divided by the change in investment.
Finally, two additional measures can help minimize
unfavorable deviations from plans. Throughput Dollar
Days (TDD) will indicate whether orders are being
shipped on time, and Inventory Dollar Days (IDD)
reflect whether unnecessary inventory is being created.
Specifically, the two measures can be expressed as:
TDD = Selling Price of Large Orders
✕ Days Shipped Late
IDD = Selling Price of Excess Inventory
✕ Days Unsold
Adding a “Report” Phase to
Six Sigma’s DMAIC Framework
A useful, added step to any Six Sigma project is the
creation of a final report, as suggested in the book Six
Sigma for IT Management by Sven den Boer (lead
author). Management accountants and internal auditing specialists easily can appreciate the value of clearly documenting the before and after processes and
results of any Six Sigma project. A well-written report
allows an organization to share the lessons learned
with other vested stakeholders, such as the internal
and/or external audit teams, as well as provide a solid
justification when asking for more money to increase
system capacity. A typical report will include the following seven sections:
The larger the above two measures, the more
unfavorable the variance. Ideally, both measurements
should equal zero in an optimized system.
1. Background. This section provides a quick overview
of the challenges and issues that led to the project.
It should also identify the team members, project
champion, and other stakeholders with a vested
interest.
G I V I N G C U S T O M E R S W H AT T H E Y W A N T
In his 2007 book Reaching the Goal, John Arthur Ricketts
argues that TA metrics may indeed offer several distinct
advantages over traditional cost accounting metrics and
even activity-based costing. According to Ricketts, traditional CA and ABC systems do not specifically
address the issue of Voice of Customer (VOC)—the
point of departure in Six Sigma. Instead, various cost
education initiatives are emphasized, such as more efficient setups where larger batches are being combined
with fewer setups. As such, Ricketts argues that, in
today’s highly competitive environment, the primary
focus ought to be on producing products and delivering
services that customers value and demand, not on manufacturing those that are more cost efficient. Traditional
CA and ABC have a tendency to encourage various
operations to produce inventory over and above what is
truly needed to fulfill customers’ orders (another major
focus of Lean Six Sigma is the elimination of “muda,”
or waste). This, of course, is the exact opposite effect of
what cutting-edge operation improvement methodologies such as Just-in-Time (JIT), Total Quality Management (TQM), and TOC have shown.
Ricketts also points out that the process improvement
emphasis on the high utilization of machinery and labor
is the main culprit behind the creation of excess inventory, which, rather than being expensed on the income
statement in the period incurred, sits as an asset item
2. Problem statement and root cause analysis. This
next section should clearly outline the symptoms
associated with the initial process or system and
discuss why the problem is significant by clearly
outlining the major financial and nonfinancial costs
of quality failure. Next, the results of the root cause
analysis should be discussed. VOC issues/considerations may also need to be outlined and covered in
this section.
3. Identification of the Critical to Quality (CTQ) internal
process and its significance.
4. Methodology and tools used and rationale. The
team ought to discuss not only the methodology
and tools used but also the reasons why the combined TA/Six Sigma framework outlined in this article offers added benefits, especially in the short run
(TOC effect).
5. Easy-to-read-and-interpret results in terms of financial benefits, customer satisfaction, and waste
reduction.
6. Conclusions and recommendations based on the
DMAIC results of the project.
7. Lessons learned and suggestions for follow-up or
spinoff projects to further enhance the newly finetuned project, especially if the organization uses the
DMAIC methodology only as needed.
M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY
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SPRING 2011, VOL. 12, NO. 3
Table 1:
Using the Six Sigma Cycle to Accomplish TOC Objectives
Six Sigma Phase
Tactical Objectives
Tools







Define
Secure Project “Champion”
Project Charter
List of Team Members
Voice of Customer Defined
Process Observation
Tree Diagrams (see sidebar on page 15)
Problem Statement
Measure
Identify the constraint
◆ Control Charts
◆ Statistical Analysis
◆ Pareto Diagrams
Analyze
Determine how to exploit the
constraint
◆ Fishbone Diagrams
◆ “5 Whys” Analysis
◆ “What if” Analysis
Improve
Elevate the constraint by
subordinating everything to the
constraint








Brainstorming
Benchmarking
Process Flow Improvement
Line/Process Balancing
Simulation & Testing
“What if” Analysis
Kaizen Initiatives
Muda (Waste)
Control
Once the constraint is broken,
go back to step 1 in order not to
allow inertia to become the
new system constraint








Reduction/Elimination
Implementation of Throughput
Accounting (TA) Metrics
Control Charts
Implement Plan-Do-Check-Act
(PDCA) Cycle
Training Plans
Poka-yoke (Mistake Proofing)
(inventory) on the balance sheet. This can easily enable
a manager using full absorption costing to manipulate
revenue …
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