Book Reviews: The Theory of
Constraints and Its Implications for
Management Accounting by Eric Noreen,
Debra Smith, James MacKey
The Goal (1984, Goldratt and Cox)
paints a dim view of cost accounting. The
disagreement is fundamentally about
performance measures. Under
full-absorption product-costing, there is
a tremendous incentive to build inventory
and keep machines busy. Under the
throughput-accounting methodology
advocated by the theory of constraints,
the emphasis is on producing only those
products that can be sold. Switching a
factory to operate by the theory of
constraints often causes full-absorption
measures to move sharply in the wrong
direction, even as the factory improves
bottom-line measures such as revenue and
profit.
This criticism of full-absorption
costing is not new, however. Opponents of
absorption costing have long argued that
it leads to excess inventory. What
Goldratt has done is to dramatically
display the debilitating effects of
excess inventory, and to promote a
methodology (the theory of constraints)
that leads to a sharply different set of
measurements:
- Throughput - the rate at which the
factory generates money through actual
customer sales;
- Inventory - money the factory has
invested in things which it intends to
sell; and
- Operating Expenses - money the
factory spends in order to turn
Inventory into Throughput.
These performance measures are not
entirely revolutionary, however. Variable
costing is a widely-taught alternative to
full-absorption costing; throughput
accounting is to a great degree an
extreme version of variable costing.
Contribution margin analysis is also
taught in management accounting classes,
and embodies many of the ideas of
throughput-accounting.
Several questions remain, however:
 How exactly
does throughput-accounting differ
from tools of management accounting
such as variable costing and
contribution margin analysis? |
| How are
companies using throughput-accounting
in practice? Have they thrown out
their existing full-absorption
reports and replaced them with
throughput-accounting reports? Or are
they using a mixture? |
In this book, Noreen et al. present
the results of their study on these
questions. They begin with a presentation
of the theory of constraints, and a
comparison of throughput-accounting with
the newer management accounting methods.
This section of the book is brief but
thorough, and does a good job comparing
and contrasting the methodologies.
Next, the authors present case study
summaries of factories (no wafer fabs,
unfortunately) that have implemented the
theory of constraints. Although not a
statistically random sample -- the
authors solicited volunteers at
conferences sponsored by the Avraham
Goldratt institute -- the case studies
still provide useful insight into how a
company can use the theory of constraints
in practice. As an added benefit, the
authors report on the extent to which the
more abstract thinking processes (a
generalization of the theory of
constraints presented in later Goldratt
books) are used at the study sites.
The book concludes with the
authors’ observations and
speculations regarding the theory of
constraints and its implications for
factories. Although the authors seem a
little too ready to stand in awe of the
thinking processes, they do a good job of
outlining when and how these techniques
could be used in practice.
It’s certainly not a page-turner
-- how many accounting books are? -- but
this book achieves its stated purpose and
makes a handy bookshelf companion to the
The Goal and It’s Not Luck
(Goldratt 1994). If you are interested in
the comparison of throughput accounting
and variable costing / contribution
margin analysis, it is especially
valuable.
If you would like to buy this book,
just click on the following link to open
a new window and go directly to The Theory of
Constraints and Its Implications for
Management Accounting on
Amazon’s website. FabTime is an
Amazon affiliate.
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