Explain throughput accounting and how it differs from traditional costing.

• A. Throughput accounting ignores bottlenecks and focuses on full absorption costing.
• B. Throughput accounting equals activity-based costing.
• C. Throughput accounting focuses on bottlenecks and value creation, prioritizing throughput over cost reduction; uses measures like throughput, inventory, operating expense.
• D. Throughput accounting adds all costs to the product to determine profitability.

Answer: (C)

Throughput accounting centers on how fast the system can generate money, with bottlenecks limiting capacity. It measures throughput as the selling price minus totally variable costs (primarily materials), while treating inventory as capital tied up in the system and operating expenses as the other costs required to run the process. The goal is to maximize throughput, not just cut costs, and to make decisions that improve the bottleneck’s contribution to the bottom line. This leads to focusing on value creation and how each action affects throughput, rather than simply lowering unit costs.

This differs from traditional costing, which allocates all costs to products (often including fixed overhead) and emphasizes reducing cost per unit. That can drive decisions that improve reported unit cost without actually increasing the rate at which the system earns money.