Throughput per employee-Throughput (revenue minus variable costs) divided by number of employees.

Inventory turns-Variable cost of sales divided by average Inventory held during the period.42 Throughput per unit of Operating Expense-Throughput divided by Operating (fixed) Expenses.

Of course, specialized industries have developed many other TOC metrics to provide feedback and control information in real time, or close to real time.

Sensitivity Analysis

The same metrics used for Throughput control can be used to perform "What if?" types of calculations. Sometimes decisions must be made quickly without time for submission to another person or department for analysis. In order for operating people to be able to analyze a situation quickly, they need a simple-to-understand method. For example, the same "value days" formula illustrated earlier for Inventory and Throughput control can be used to compare various possible investments. Four examples of $60,000 investment opportunities, each with different cash flows, are shown in the "Investment Examples" spreadsheet of the file "VALUE-FORMULAandEXAMPLES" (located online at: www.mhprofessional. com/TOCHandbook.

A "flush" point, where all value days' cash investments have been recovered, follows Goldratt's (1997, 246) development and is contrasted with payback period.

For comparison purposes, net present value (NPV) calculations are shown alongside the value-days calculations. For short-term (less than one year) decisions, NPV does not change significantly when using discount rates ranging between 10 and 20 percent. While the decisions indicated by NPV match those of the value-days calculations for three of the investment opportunities, although with much less clear discrimination, in one example, NPV indicates an acceptable investment and the value-days analysis shows it is unacceptable. The rationale behind using value days rather than NPV is that investment amounts are constrained by availability, not interest rates.43

Throughput Accounting Approach to Performance Evaluation

TOC is very much a team sport. Therefore, evaluation should be on a team basis. Individual evaluation should be in the form of mentor feedback for improvement, as indicated by a request from the individual involved or a supervisor. In the absence of a clear need, feedback provided to individuals should not be used to evaluate performance. If a team is downgraded due to performance of one or more individuals, the team is expected to correct the problem. One company in Austin, Texas, hires all employees on a temporary basis for three months. At the end of the trial period, the team meets and decides whether a permanent position is offered.

Possible Explanations for the Lack of TOC Literature in Accounting and Finance

Three major reasons account for a dearth of TOC literature in accounting and finance. First, accounting students generally are not well trained in internal reporting and operations management. I believe that this may be because the Certified Public Accounting (CPA) professional examination has contained only about 10 percent of internal reporting material for a number of years. A new Content Specification Outline (CSO)44 for the CPA exam, effective January 1, 2011, contains updated requirements that include increased emphasis on management accounting and operations, including TOC.45 PhD students typically are not exposed to TOC, while MBA students at least are required to read The Goal (Goldratt and Cox, 1984).

Second, there is no incentive for accounting and finance professors to spend time becoming proficient in TOC concepts because they are primarily evaluated and promoted based on their research publications in the recognized top quality (mostly theoretical) journals where, at least in the United States, "applied" articles generally are not welcomed.46 Bill Ferrar, recipient of the Lifetime Contribution to Management Accounting Award, has called for the teaching of TOC, but he suggests it could only occur by team teaching with a manufacturing engineering professor (Ferrara, 2007, 172).

Third, there is little or no demand from business school constituencies that TOC concepts be taught to students. Auditing firms frequently make accounting departments aware of their desire to hire students schooled in certain topics, such as XBRL (eXtensible Business Reporting Language) and IFRS (International Financial Reporting Standards), but as yet there is little or no push from industry for accountants who have been trained in either TA or TOC. This should not be surprising since even firms that have adopted TOC typically do not include accounting and finance people in their training classes until improvement initiatives become accounting and finance targets for cost reduction.

Future TOC Accounting/Finance Research Needs

There have been relatively few publications by accounting or finance writers relating their research and conclusions on the subject of TOC. The field is entirely open.

Case Studies and Simulations

There is a desperate need for practitioners of TOC to partner with accounting or finance academics and publish case studies of their experiences, both good and bad, from a finance or accounting perspective, along with analysis of major factors that contributed to the success or failure of the initiative. It also would be most interesting to read a case of an accounting or finance area applying TOC concepts to their own operations. The quality and efficiency of accounting reporting systems could also be examined.

Information and Decision Making

Accountants have a broad perspective of an organization. To provide increased value to an organization, accountants need to establish internal information systems that aid decision makers. There is a need for research on the decision-making process, the behavioral aspects of decisions, single versus multiple decision makers and the quality of decisions, and supply chain information and accounting.

Decision-Making Processes

While accounting and finance personnel usually do not make operating decisions, they do guard the treasury and must approve acquisitions. Therefore, they must understand legitimate investment needs.

It would be enlightening to see a rigorous study of short-term decisions, generally defined as decisions where the impact is experienced in one year or less and decisions must be made quickly, and long-term decisions where the decision time frame is longer and the impact is felt perhaps years later. What about the assumption that short-term decisions can affect (or become) the long-term? Who typically receives credit for long-term decisions where the cost is incurred much earlier?

What really is needed is a TOC conceptual framework for management accounting similar to Concepts Statements47 provided by the Financial Accounting Standards Board (FASB) for financial accounting. That is, a TOC conceptual framework establishing desired information concepts would encourage an entire, internally consistent, reporting system including information objectives, decision support criteria, and periodic income statement reporting in a format that facilitates quick decisions by line managers as well as executive managers. A TOC conceptual framework would guide possible courses of action under various circumstances and promote the inclusion of the impact of decisions on external financial statements as well as on cash flows. Such a conceptual framework would guide the development of policies, procedures, and metrics to support a TOC environment.

Behavioral Aspects of Decisions

Several aspects of the behavior of decision makers can be influenced by the motivation and reward structure established by an organization's performance evaluation system. A study of the unintended effects of performance evaluation and how to structure a system that does not encourage dysfunctional behavior48 such as that reported by Austin (1996) in Measuring and Managing Performance in Organization would be a significant contribution.

Because TOC requires teamwork, should evaluation be made only on the team's performance? How can a team address conflicts in local measures early in a change process? Should a team evaluate individual team members? Are team decisions superior to ones made by individuals? Always? Are certain decisions best made by an individual? How should decisions be evaluated?

Supply Chain Accounting

With all the changes being made in the structure and behavior of supply chains, it would be most interesting to see an accounting/finance solution to the problem of risk- and profit-sharing among all supply chain partners. Other issues, such as required quality, speed, and who benefits from reduced costs or other improvements, also need to be addressed.

Part of the charge for management accounting includes providing a comprehensive internal information system. During the recent global recession, supply chain partners several steps away from the final customer were shocked when markets suddenly dried up with no warning. Sometimes a supply chain member did not even know the final use of their component (Dvorak, 2009). The communication and presentation of information, both frequency and mode, merits further study.

Summary and Introduction of Remaining Chapters in This Section

Chapter Summary.

To explain our current accounting and finance environment, the first part of Chapter 13 describes a short history of cost accounting and the massive changes in the business environment during the 20th century. Management accounting's response, while lagging changes in business, includes the development of direct (variable or contribution margin) income statements to more closely tie income to sales, activity-based costing to more "accurately" trace all costs to cost objects (products), balanced scorecards to stress the importance of nonfinancial metrics, Lean accounting to match the value stream flows in manufacturing, and updated budgeting concepts that permeate all of these methodologies. Both the advantages and disadvantages of these approaches are reviewed.

The remainder of the chapter covers TOC concepts of planning, control, and sensitivity analysis. Figure 13-1 establishes a simple example that is used to demonstrate both planning and control concepts. The negative impact of inventory reduction on GAAP accounting income is demonstrated and compared with TA results. Throughput value days is discussed and applied to inventory control, delayed Throughput, and potential investments. Additional TOC metrics are mentioned. Three files containing multiple spreadsheets, available online, provide supporting data for examples used in the chapter.

Finally, the chapter addresses possible reasons for the lack of TOC literature in accounting and finance and issues a call for further research.

Other Chapters Dealing with Performance Measures

In Chapter 14, Debra Smith and Jeffrey Herman further describe desirable logistic measurements and demonstrate a framework to pull required information from an operation. They use TOC Thought Processes (TP) tools to defuse conflicts and deal with potential negative outcomes before they occur. A nice case study shows the application of these elements.

In Chapter 15, Alan Barnard establishes a framework for designing and implementing a continuous improvement process, along with an auditing process to focus improvements where they are most needed. Alan describes the use of Strategy and Tactics trees both in implementing an improvement and in auditing the progress of the implementation.

Chapter 16 provides a historical perspective on the need for a holistic approach to implementing TOC concepts. Two well-known TOC experts, Dr. Alan Barnard and Mr. Ray Immelman, present implementation case studies, one involving a public sector company and the other a private company.

References

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Antonelli, V., Boyns, T., and Cerbioni, F. 2006. "Multiple origins of accounting-An early Italian example of the development of accounting for managerial purposes,"European Accounting Review 15(3):367.

Austin, R. D. 1996. Measuring and Managing Performance in Organizations. New York: Dorset House Publishing.

Bhimani, A., Gosselin, M., Ncube, M., and Okano, H. 2007. "Activity-based costing: How far have we come internationally?"Cost Management 21(3)(May/Jun):12.

Bourne, M., Neely, A., Platts, K., and Mills, J. 2002. "The success and failure of performance measurement initiatives: Perceptions of participating managers,"International Journal of Operations & Production Management 22(11):1288.

Bragg, S. M. 2007a. Management Accounting Best Practices: A Guide For The Professional Accountant. Hoboken, NJ: John Wiley & Sons.

Bragg, S. M. 2007b. Throughput Accounting: A Guide to Constraint Management. Hoboken, NJ: John Wiley & Sons.

Brandt, D. 2009. "Searching for lean with lean,"Industrial Engineer 41(5)(May):50.