Invasion of the through-putters

Roger Trapp looks at a new method of accounting that has emerged to deal with dramatic changes in manufacturing
To most people, the initials TA conjure up images of office workers playing soldiers at the weekend. But to a growing number of accountants working in manufacturing they stand for Throughput Accounting.

The concept - still in development - is the latest attempt to grapple with the changes that have resulted from the transformation of manufacturing in recent years.

The success of Japanese manufacturers led management thinkers and their consultants and clients to focus on such concepts as Just in Time, Total Quality Management and World Class Manufacturing. The combination of this trend, with advances in manufacturing technology and growing competition, created something of a crisis among not just general managers but also the financial specialists working alongside them.

There is no doubt that the stock of management accountants is on the rise. Their professional body, the Chartered Institute of Management Accountants, may have failed in its attempt to merge with the Institute of Chartered Accountants. But survey after survey finds increasing support for their qualification, while the rise to prominence of the likes of J Sainsbury 's finance director, Rosemary Thorne, is raising the institute's profile.

However, there is some dispute among their ranks about how best they can carry out their role, and so resolve the problems caused by the huge changes going on in industry.

Activity-Based Costing was one response to the growing feeling that existing accounting systems were inadequate, particularly in the areas of costing and control systems. Another was to rethink management's reliance on accounting as its central source of information - a reaction that put across the view that such behaviour was "like driving a car, looking in the rear- view mirror".

It called for a "balanced scorecard" approach, with non-financial performance measures being taken into account.

The arrival of "throughput" as a possible solution is down to the belief of a third group (working outside accountancy) that accounting is too important to be left to accountants.

It derives from Eli Goldratt's Theory of Constraints, in which the maximisation of throughput is seen as the most important factor in increasing profitability.

Under this approach, cost accounting - far from being the key to performance on the grounds that it identifies where the profit comes from - is seen as "enemy number one of productivity". This is because, according to the throughput proponents, local performance measures obscure the goal of the organisation.

This thinking is starting to gain a hold in business and in the Chartered Institute of Management Accountants, which has made throughput accounting a part of the syllabus.

Although it began about 20 years ago with Mr Goldratt's analysis of the management of production bottlenecks and the development of production scheduling software called Optimised Production Technology, it has been taken up in Britain by the management accountants David Galloway and David Waldron.

They call for a new language for manufacturing that would replace traditional concepts such as direct/indirect cost allocation, economic batch size and treating inventory as an asset. Instead, they say accounting should be concerned with such matters as the rate at which businesses make money and highlight return per bottleneck hour.

However, research recently published by Cima suggests that the consultants - lacking accountancy backgrounds - had become confused. At one point they even withdrew their approach in favour of "enemy number one" - activity- based costing.

But the research booklet, Accounting for Throughput, by David Dugdale and T Colwyn Jones of the University of the West of England, goes on to examine the introduction of the concept at one company - and comes to the conclusion that it can be effective. Throughput thinking, as developed as part of the Theory of Constraints - which aims to remove traditional information systems in favour of greater simplicity and variable or marginal accounting approaches - "appears to have considerable potential for transforming the management of manufacturing, especially over the short term," they write.

There are certain similarities with JIT and TQM philosophies that many British companies claim to have adopted, they say, though the throughput concept has a more specific and sequential approach.