Throughput Accounting


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Through-put Accounting methods and the application of the knowledge that we gain from this information. We discussed the use of accounting throughout the organization for developing predictive measures versus reactive. This is not your regular accounting discussion.

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Throughput Accounting

  1. 1. Business901 Podcast Transcription Implementing Lean Marketing SystemsThroughput Accounting making yourOperations Numbers Meaningful Guest was Dr. Charlene Spoede Budd Related Podcast: Developing Predictive Measures with Throughput Accounting Developing Predictive Measures with Throughput Accounting Copyright Business901
  2. 2. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsDr. Charlene Spoede Budd was my guest on the Business901Podcast and as you would expect our discussion was about theTheory of Constraints Through-putAccounting methods and the application ofthe knowledge that we gain from thisinformation. We discussed the use ofaccounting throughout the organization fordeveloping predictive measures versusreactive. Dr. Budd was a contributor to therecent Theory of Constraints Handbook ontwo separate subjects:Traditional Measures in Finance and Accounting, Problems,Literature Review, and TOC Measures (Chapter 13 of Theory ofConstraints Handbook)A Critical Chain Project Management Primer (Chapter 3 of Theoryof Constraints Handbook)Charlene Spoede Budd is a Professor Emeritus from BaylorUniversity, where she taught management accounting and projectmanagement classes for a number of years. She is certified in allareas of the Theory of Constraints and is the Chair of the Financeand Metrics Committee of the Theory of Constraints InternationalCertification Organization. Her research has been publishedprimarily in practitioner journals and she has been awarded threeCertificates of Merit for articles published in Strategic Finance. Dr.Budd has co-authored two accounting textbooks with her mostrecent book, A Practical Guide to Earned Value ProjectManagement. Developing Predictive Measures with Throughput Accounting Copyright Business901
  3. 3. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsJoe Dager: Im ready to go because I want to learn aboutaccounting?Charlene Spoede Budd: Youre one of the few, but Imappreciative of that! Its not a mysterious subject. I think a lot ofpeople at some point in their lives get turned off of accountinglike they get turned off of math. Its just because it seems socomplicated. In reality, neither one is that complicated, but theybuild on very simple steps.Joe: Thanks everyone for joining us. This is Joe Dager, the hostof the Business901 podcast. Joining me today is Charlene SpoedeBudd whos a Professor Emeritus from Baylor University whereshe taught management accounting and project managementclasses. She is an expert in applying Theory of Constraints tothese disciplines, and authored several chapters in the "Theory ofConstraints" handbook. Charlene, Im looking forward to thisconcept or this discussion because Im just really excited to learnmore about accounting and how to apply Theory of Constraints toit. Can you start us off and get started with the discipline ofaccounting and how you do that.Charlene: Right. Thank you so much for having me. I really,really like to talk about accounting because its not everybodysfavorite subject. So Im very appreciative of your enthusiasm forit. Its not that difficult, a very easy concept as long as you followsome ordered steps and taking a look at the entire plateau. WhatI like to do is kind of keep it very simple. Do what needs to bedone to get the information out that you need to make decisions.Thats basically what management accounting is about.Joe: When you talk about Theory of Constraints, you talk aboutthroughput accounting. Can you kind of define that in simpleterms for our listeners, what throughput accounting is?Charlene: Throughput accounting, basically, is all of theaccounting metrics and measures that you have to have Developing Predictive Measures with Throughput Accounting Copyright Business901
  4. 4. Business901 Podcast TranscriptionImplementing Lean Marketing Systemsembedded in your information system in order to support theoryof constraints decisions. Now, thats not as ominous as it sounds.Throughput in accounting terminology is contribution margin.Throughput in Great Britain is revenue. So the definitions get alittle confusing across the various countries and the world. So Itry to make clear what Im referring to as throughput.Throughput in the sense of throughput accounting, TA as we callit, is whatever you have to do to support your system.Throughput, on the other hand in theory of constraintsterminology, is revenue minus totally variable costs. So thats theaccounting definition of contribution margin. Unfortunately, Elideveloped all of these terminology issues, the labels for things,and he did not study accounting and didnt know that there werealready were labels for that. So I try to use both interchangeablyso that I can keep people aware of exactly the concept thatstrying to be presented.Joe: How did you get involved with this? I assume you have astrong accounting background.Charlene: Right. I did the traditional thing. I had anundergraduate accounting degree. I got an MBA. I got a Ph.D.And then I started looking for interesting things, which is whypeople get PHD’s in the first place. They like to study. They like topick up new knowledge. I ran across, at a seminar at BaylorUniversity, Eli Goldratt speaking to a bunch of professors. He justinfuriated me. I got so angry with him because he was telling theprofessors that we were laying down on the job. We werentdoing what we were supposed to do. We werent serving thepublic in terms of educating students the right way anddeveloping new methodologies for industry and critiquing themethodologies that they were using.I spent about three months trying to prove that his little basicsimple concepts were just all wrong. The longer I worked at it,the more convinced I became that he was right. A lot of the Developing Predictive Measures with Throughput Accounting Copyright Business901
  5. 5. Business901 Podcast TranscriptionImplementing Lean Marketing Systemsthings that I had been taught and had learned in college werebased on another environment. Basically, it was that we did notlive in a mass production environment at the time which wasabout 1991 or 92. For sure, its just gotten worse since then;things are just changing so fast.One of the issues I think I had with lean accounting, becausethey have to set up flows, value chains, where they have a familyof products going through the same thing, that is not ashort-term endeavor. Setting up a separate value chain is apretty intensive investment in both time and dollars.Joe: Segmenting your value stream in that, when youre talkingabout lean accounting, that pops out to me because I do a lot oflean things and value stream and handle... Yet youre saying itswrong!Charlene: No, Im not saying its wrong. In fact, there are someexcellent things about lean. I read all the lean books from Toyota,starting with "The Machine That Changed the World", then "TheToyota Way", and "The Toyota Talent" and "The ToyotaFieldbook", and all of that. The big problem with it is thatcompanies have trouble copying Toyota. Toyota does manage topull off the value stream, but Toyota has never publishedanything about their accounting system. So, when lean becamepopular in the US, it ran smack up against traditional accounting.And so people had to come up with a way to deal with lean andnot violate or get the accounting people all upset and telling themthat they couldnt do it. So we sort of developed our own systemof accounting for lean. And part of that is fine. Some of it justreally doesnt make any sense.Joe: You said the key thing is that well try to adapt to theToyota culture, the Toyota way of doing things. Its nice to have amodel to follow. But if youre trying to develop methodologywithout really developing your own culture, your own way of Developing Predictive Measures with Throughput Accounting Copyright Business901
  6. 6. Business901 Podcast TranscriptionImplementing Lean Marketing Systemsdoing things, I think it is wrong. I think its a nice model to have,but you certainly have to take something and make it your own.Charlene: Right, youre absolutely correct. That is true. Part ofthe problem, one of the things I mentioned in the accountingchapter in the TOC handbook, is that typically accounting peopleare not trained in the new operating methodologies. So, if theyrenot trained, they dont know about it. They dont know how tomodify their metrics. They dont know which reports need tocome out when and to whom and that sort of thing. And so,naturally, youre really just asking for it if you dont include theaccounting people from day one.Joe: I agree with that because, to me, we always struggle withmaking what I call meaningful dashboards with leading indicators.Accounting doesnt seem to be included in a lot of that.Charlene: No, no, its really not. Jean Cunningham, who wrote"Real Numbers" and has written a chapter in the latest lean bookthat Im reading, was fortunate enough that, in her companywhere she was CFO, she was included from day one. Theirimplementation was a success because she supported it. Insteadof a constant battling against the accounting people, she knewwhat was needed and where and made sure that they got thecapital investments that they needed. And also that some of thereports that they had been issuing, like efficiencies, were verymuch controlled and downplayed.Joe: Getting back to the throughput accounting, is that a fairterm to use instead of TOC accounting or anything? We shouldcall it throughput accounting?Charlene: Yes, its kind of filtered down now. Throughputaccounting is referring to a specific set of things. And so nowthats the official name. Developing Predictive Measures with Throughput Accounting Copyright Business901
  7. 7. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsJoe: In your chapter in the TOC handbook, you talk about all thedifferent types of accounting a little bit or you touch upon a lot ofthem, the activity based, lean accounting, direct costing, thenyou talk about the balanced scoreboard. You listed theadvantages and disadvantages of each. Of all these, is there onethat aligns itself with throughput accounting better than theothers?Charlene: Yes. Thats the direct costing. In fact, the throughputaccounting statement is based on the direct or variable costing orcontribution margin income statement, which is also described inthe book. But, the reason for that is that in the 1960s accountingpeople discovered the behavior of costs in a meaningful way,meaning that they decided that you needed variable costs forcertain decisions and fixed costs for other decisions. But you didnot want to turn a fixed cost into what appeared to be a variablecost driving it all the down to the cost per unit.So, since the 1960s we have known that if youre going to do adecision on accepting a special order, if youre going to add ordraw up a product. If youre going to decide on make or buy,youve got to have your cost divvied up into a variable bucket anda fixed bucket.This also goes for lots of other decisions that you have to make.Theyre typically called short term decisions because in the longterm youre expected to be able to change everything includingfixed cost.What ABC does is really carry this idea over the long run,everything is variable to the extent that they assume thateverything is variable including whatever direct or traceable fixedcost you have.Technically, youre never supposed to allocate organization costlike security for the company or maybe grounds keeping for theheadquarters or corporate headquarters costs period. But, every Developing Predictive Measures with Throughput Accounting Copyright Business901
  8. 8. Business901 Podcast TranscriptionImplementing Lean Marketing Systemsimplementation I have seen included all of those costs on the ABCallocation.Lean is trying to avoid that. Every book on lean says that if youhave overall organization costs that benefit everybody, everystream, every product family, then just dont allocate those. Imean, you cant do it anyway except arbitrarily anyway, and thenthat makes people make some stupid decisions.So, theyve got the right idea. The problem is, and some of thelean accounting books that Ive seen, they go right ahead, theymake a statement, well, youre not supposed to allocate thesecosts, and then they go right ahead and do it.The people looking at the data may not have that understanding,and then they look at a cost per unit number and think its thevariable cost when it may not be.Joe: What makes throughput accounting special though? Whatsthe advantage I would have to investigate the time in learning it?Charlene: It supports Theory of Constraints. Ive done a lot ofstudying over the years on various improvement initiatives. Istarted with Deming. I even went back and picked up Mary FosterFollet. She was a writer in the 1920s that Deming took a lot of hisideas. If he didnt take them from her, theyre so very similar,they were developing at the same time, Deming ensured in all ofthe quality guides all the way through everything that has comedown the pipe since then. I even wrote what they call a portfolioor Bureau of National Affairs called Internal Reporting andImprovement Initiatives. I looked at every one of theimprovement initiatives. By the time I got through looking at allof them, it wasnt just Quality, Just in Time, Lean, ABC, ABCmanagement, I also looked at Demand Flow and Theory ofConstraints. Developing Predictive Measures with Throughput Accounting Copyright Business901
  9. 9. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsWhen I got through looking at all of them, the one that hadsomething that the others didnt, theyre all blending togethernow, by the way. I mean, everybody is stealing the best of whateverybody else has to offer. In looking at the whole thing, Ibecame confirmed in my belief that Theory of Constraints offeredone thing that they did not and that is focus.Theory of constraints tells you what to do first, what to dosecond, what to do third. The others say do this, make thesechanges, but they dont tell you where. They just say do iteverywhere. Put all your production operations in a value stream.Well, that takes time. The latest book I looked at said, just likethey used to say with quality initiatives, you cant get resultsimmediately. Lean transformations take about two years. Well,two years is a long time. Some companies, you know, if they hadto wait two years, might not be around for the two years whenthe time was up.Theory of constraints tells you, OK, its not going to be perfectbut this is what you do first and you can get some results in twoor three months. I think thats a tremendous advantage.You still use quality concepts. You still use the idea of just in timeand lean. The lean part worries me just a little bit. The one thingI worry about with lean is that they are so focused on cuttingnon-value added costs that I fear that they will cut into protectivecapacity or surge capacity. If they do that, then their delivery tocustomers will suffer. I mean, they will not be able to deliver ontime if they get even a slight increase in orders.So, there has to be some protective capacity at all timeseverywhere you can. You cant do that everywhere. Thats wherethe Theory of Constraints says where you have the least capacity;it may not be a true constraint because the market may be yourconstraint. But it allows you a focus point to schedule all of youroperations depending on the performance of that one department Developing Predictive Measures with Throughput Accounting Copyright Business901
  10. 10. Business901 Podcast TranscriptionImplementing Lean Marketing Systemsor piece of equipment or area or product or whatever youvechosen to actually coordinate everything.Coordination is a big thing in manufacturing and in service. Imean, you want things to flow. Lean is talking about flow.Deming talked about flow.Joe: I think flow and cadence is very important in todays worldbecause things do change so quickly. But really, when Imlistening to you talk here about the throughput accounting is thatyou really cant institute Theory of Constraints because you haveto have data supporting it and your accounting supplies the data.Charlene: Absolutely. It provides the metrics that tell peoplewhether theyre doing a good job, whether theyre improving,whether theyre getting worse. Hopefully that doesnt happen, butif it does, you sure need to know about it right away. Weretalking, in some cases, real time information. It is not unusual atall to have terminals spread across a factory floor where thingscan get analyzed very quickly and pushed back out and peopleknow where they stand at all times.Joe: What I really like is the fact that this kind of takes theaccounting from coming up with the month end reports andsaying this is what happened, this is what happened, to a moredynamic participation in the company management, doesnt it?Charlene: Absolutely. In fact, the monthly or quarterly orannual reports that the company comes out with, their GAPstatements, their generally accepted accounting principlesstatements that they have to file publicly with the SEC if theyre apublic company. Those are fine for people who are not inside thebusiness who cant see whats going on until they get thesereports. Inside the business, they need daily, weekly updates,sometimes, even hourly updates, as to how theyre doing,whether the orders are going out on time, every day. If theyre Developing Predictive Measures with Throughput Accounting Copyright Business901
  11. 11. Business901 Podcast TranscriptionImplementing Lean Marketing Systemslate, why are they late? We can collect all that information andthats the way things get improved.If you find that youre constantly waiting for one operation to geteverything shipped or youre waiting for one part or onecomponent or one something, you can go find out whats wrong.Why isnt it here? If its a quality issue, you pull in all of thequality techniques to solve the quality problem. If its a flowissue, you might have to go to lean and say, "OK, how can wesmooth out the flow here? Weve have a disconnect, and we canfix it with that."Youre trying for just in time everywhere but just in timepractically have to result from all the other initiatives that youreengaging in. You cant just do just in time isolated fromeverything else, it just doesnt work. We tried that, lots of firmstried that in the 1980s and had initial success cutting work inprocess and then they were so encouraged they cut some moreand then they found they couldnt deliver. So, just in time had ahorrible reputation with businesses for about a decade becausethey had tried it and thought it didnt work.Well, it does work; its just that its another issue of copyingsomebody elses process. The Japanese had developed it andso - they were very proud of it so they showed us how they weredoing it. So, we come back and we tried to do it like that. But wehad quality issues; we had all kinds of problems that they hadalready fixed. If we had done quality first, then Just in Time, itwould have had a much better success ratio.Joe: We always called it "jet it in time." That was ourterminology about it? You can see I tried to institute it.Charlene: By the way, your whole supply chain has to bedeveloped that way. You cant do it just one little company byitself. Developing Predictive Measures with Throughput Accounting Copyright Business901
  12. 12. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsJoe: It does take some time and youve got to have buffer stocksomewhere. It has to be there. When looking at throughputaccounting, it really intrigues me because if forces you to beactive. We need to be so proactive and so agile today. Accountingseems to be in the Dark Ages about this stuff.Charlene: Well, because they havent had any of the training,so theyre falling back on their education and their experience.And, heres the thing that I dont think a lot of people appreciateabout accountants. They have a lot of responsibility; they haveprofessional responsibility and they have responsibility to thefirm. Thats why accounting people have the name controllers;they control the fiscal aspects, they think, of the organization.This was a hard thing for me to understand and give up. I wasalways taught in school that the accounting people truly docontrol the company; theyre in charge. So, you cant let peoplego wild and you have to watch the budget and you have to tellpeople when theyre being efficient and effective and whentheyre not. So, you build up students like this and I wasnt thatyoung when I went through college, but I bought into it. Ithought, "Oh, yeah, seems great. Accounting may not be toosexy but, at least, you have power."I kept that attitude, basically, until I started learning about TOCand going through intensive training. I cant tell you how manyweeks I have spent in classes learning about the theory ofconstraints, when I had no manufacturing backgroundwhatsoever. Most of the earlier pieces of Theory of Constraintswere all in operations. I had to learn operations and then learnthe theory of constraints. It was a long process for me.But, the day I discovered that you really dont need total cost perunit for any decision, it was dismal. I mean I was so depressed, Iwent into a weekend slump just because once that becomesapparent, all the work you do to come up with that number isworthless. Most of the problems in coming up with a cost per unit Developing Predictive Measures with Throughput Accounting Copyright Business901
  13. 13. Business901 Podcast TranscriptionImplementing Lean Marketing Systemsis figuring out all the allocations of the fixed costs. Well, if youdont allocate them, the accounting is nothing. I mean you donteven have to have an accounting degree to do throughputaccounting.Now, to do gap accounting, absolutely and heres the trick. Youhave to - this is my personal opinion - I think if you cant showhow your internal reporting system ties in with your gap reportingsystem, youre going to have a credibility problem. Supposethroughput accounting says that you earn so many dollars netincome this quarter or year or whatever. If you cant show howthat number - you can reconcile that number with your gapnumber, nobodys going to believe it.You can reconcile it; its very easy - well, its not very easy; itsvery straightforward how to reconcile throughput accountingincome to gap income. Once you do that, its easy to reconcile athroughput balance sheet to a gap balance sheet.Because its fairly complex, I did a spreadsheet on this and itaccompanies this chapter and it takes a four-year look at acompany that does nothing but reduce its inventory. I holdeverything else constant for the four years, sales remains thesame; everything remains the same for the four years. But, youget different incomes on the gap and the throughput but then, Ireconcile.Here was the throughput income, here is the gap, here is thedifference and here is why that difference exists. But it tookabout, I think, four spreadsheets in one file to actually show all ofthis. I tried to keep it really, really simple but, when you starttalking about accounting and allocations and the standards, ittends to get more complicated than I would have liked. But, itwas just impossible to put it in the chapter so I had to do thespread sheet. McGraw Hill is having some problems getting all Developing Predictive Measures with Throughput Accounting Copyright Business901
  14. 14. Business901 Podcast TranscriptionImplementing Lean Marketing Systemsthese additional spreadsheets and things up on their website, butits supposed to be available very shortly.Joe: Im a manager, when I look at my income statement, whatam I going to see in throughput income statement that I am notgoing to see any different in a traditional income statement?Charlene: What youre primarily going to see is that yourincome, after everything, is going to track directly with sales,with revenues. With gap, it does not. With gap accounting, yournet income is a function of both sales and production. You canproduce a lot this period and make your gap income higher thanit would otherwise be just because you deferred a bunch of coststhat you already had to pay for this period. I mean, there arecosts that you incurred and youre going to incur the same costsnext period. But they dont show up on your income statementfor gap purposes until you sell that production. So, its not a wellunderstood concept. In fact, I developed the first of this inventoryreduction example many years ago when I was doing workshopsfor accounting people. I made the statement that, if you reduceinventory, your net income is going to go down. I had peopleargue with me. I had CPAs arguing with me, "No, we can reduceinventory and our income goes up." I thought, "Well, it might ifyou sell more. But you tell your salespeople youre going toreduce your inventory by half and you want them to increasesales, in spite of that fact, youre going to have a hard timeselling it."So, I just took it to the logical extreme. Heres what happensand, if youre ready for it, you can explain it to your creditors, toyour employees, to your investors, you explain in advance, "Hey,were going to reduce inventory and, if everything stays thesame, its going to make our income look worse. So, be prepared,we hope that doesnt happen. We think we can increase salesenough to offset that. But, if it does happen, thats why." Developing Predictive Measures with Throughput Accounting Copyright Business901
  15. 15. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsPeople are smart. I mean, you dont have to explain whats goingto happen when you reduce your inventory. If theyre ready for it,fine, no big problem.Joe: I think it has to be explained to them because peopleoperate in sound bites anymore. Its not like theyre going to readfour pages of spreadsheets to determine that youre telling thetruth. They want to get it with four post-it notes pinned on thewall. Can it be explained that easy?Charlene: With throughput accounting all fixed costs areexpensed in the period. That is, you dont defer any fixed costs.You only defer variable costs that are tied up in inventory thatyou havent sold. So, thats why that throughput accounting netincome tracks directly with sales. Your fixed costs are notinventoried and then charged off later. Theyre charged offexactly when you incur them.GAP, on the other hand, says oh no, no, no, no, no. And, this isright. When you show that you are matching up your revenuewith the cost of those revenues, the cost of product or the cost ofservices, you have to include every cost that you incurred inproducing that product or that service.Its not usually a problem in a service industry because when youincur it, I mean, you incur it. I mean, you cant usually inventoryservice work. So, all of it appears on the statement at the sametime. Which is basically the same result you get with throughputaccounting? Now because of that, because the only difference,the only difference in the two statements is the fixed costs thatwere inventoried with GAP that were expensed with Theory ofConstraints.Joe: What youre saying is, are we already doing throughputaccounting then basically in service industries? Developing Predictive Measures with Throughput Accounting Copyright Business901
  16. 16. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsCharlene: Were getting the same result. Theyre not calling itthroughput accounting but theyre getting the same net incomethat they would.Joe: Inventory and that allocation of fixed cost to inventory isreally what thats all about?Charlene: Right. So, if you take the fixed costs in yourbeginning inventory and take the fixed costs in your endinginventory and take the difference there, thats going to explainthe difference in your net incomes between throughputaccounting and GAP accounting.Joe: How can I leverage that to my advantage? Is that where Ireally want to concentrate on? When I look at that and see thatfixed cost being allocated to inventory, is there a deeper meaningin that to me?Charlene: The income would be a measure of how well theorganization did. What I think youre referring to is perhapsmaybe a manager inside an organization. Who is trying to seemaybe their contribution to that overall income statement, ortheir performance or their progress? There are some other waysof doing that. You dont want to wait until the end of the period toget a financial statement of any sort before you make somedecisions because they come up every day. You need other thingsto help guide you to make those decisions.One of things you need is you need to know the total variablecost of whatever it is that youre selling. The variable costmeaning if you have one more unit of product, youre going toincur another unit of cost. Materials are the best example of this.If you want to make one more unit, youve got to have one moreunit of raw materials. So, raw materials are a perfect variablecost. Developing Predictive Measures with Throughput Accounting Copyright Business901
  17. 17. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsSales commission based on percentage of sales is a perfectvariable cost. After that it gets iffy. There are few totally variablecosts. Maybe if youre shipping is by weight or product orsomething like that, youre shipping costs might be variable. But,thats debatable today because of full truck loads and all kinds ofother things and geography. Its a questionable issue as towhether shipping costs are variable.Ive had people arguing with me lately that theres no such thingas a variable manufacturing overhead cost. That the only possibletruly variable manufacturing costs, other than materials, might beoutsourced work, and then you could treat that like materials. Itsjust a more highly advanced form of raw material.If you have a consultant come in and tells you how to rearrangeyour flow through your factory, thats an overhead cost, but is itvariable? Well, you know, its not going to vary with the numberof units you produce. I’d probably treat it as fixed.Its not a critical issue. There are so few that are on theborderline between variable and fixed. You can toss them oneside or the other and no big deal. I usually just throw everythinginto the fixed bucket unless I know for sure its variable.Now, theres just so few other than materials that are variable.But, I always put variable costs in my exercises because mostcompanies claim that they do have other variable costs besidesmaterials. And I dont want them getting hung up over it becauseit doesnt change anything, it just makes the example a wee bitmore complicated. But, thats the only thing.Joe: Throughput accounting is what you would say is the trueway to operate a company by?Charlene: Absolutely. You must know the behavior of yourcosts, which costs are going to go up, stay the same or go downif you do one thing versus another. Developing Predictive Measures with Throughput Accounting Copyright Business901
  18. 18. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsJoe: Can throughput accounting be driven, I mean, lets sayyoure only really talking a few figures, right, because you lumpall the costs together. I mean, so when were making descriptionof the supersize, its easy decision without really complicating alot of things that were doing or that we can do on a daily basis.Charlene: Right. Was that a question?Joe: Im looking at, because it sounds very simple, and it soundsvery easily done, but Ive never talked to an accountant thatmade anything simple.Charlene: Well, you know, its to our advantage to protect ourturf so that, you know, we have to explain it to you. You cantjust pick it up and get it yourself. Thats not true. Im reallyragging on accountants, but I am one, so I know how we are.But, part of it is that accountants are so well trained in thesubject and they understand exactly what theyre doing. Believeit or not, accountants understand where the holes are in theirlogic. They just dont know what to do about it.It comes so easy to them, once they explain it one time tosomebody on the factory floor, they think they should know it.They should get it. And by the time they do the same explanationthree times and the other person is not being terribly cooperativeabout it. Then, you know, its just like well, you know, you dontwant to understand or I cant help you anymore.It turns people off when theres not an effort made on both sidesto communicate. And, we accountants have, until fairly recently,did not have to have communications courses. Oralcommunication, written communication, they are both just criticalto not only delivering information but interpreting it and making iteasy for people to use.Joe: I can see how operationally you could grasp throughputaccounting very easily between managers because it makes it Developing Predictive Measures with Throughput Accounting Copyright Business901
  19. 19. Business901 Podcast TranscriptionImplementing Lean Marketing Systemssimpler to understand and makes their numbers and things thatare much more relative to them in understanding it. Doaccountants resist this? Or, whats the stumbling block gettingthem to adhere to these principals?Charlene: The only stumbling block, well there is probably acouple. One is that in most accounting programs students areprepped to be professional accountants and take the CPA exam orthe CMA exam. And, the CPA exam used to have only about 10percent of its material on the test dealing with managementaccounting concepts. Students could effectively blow offmanagement accounting and still pass the CPA exam. Recently, Iunderstand that universities are now requiring two or threemanagement accounting-type courses for an accounting degree,but that wasnt always true. So, the people who are in chargenow of accounting departments are not trained in managementaccounting for the most part.Even though they may have had a course back there somewhere,they dont recall the details unless they can hear terminologythey understand. For example, theres a big thing in theory ofconstraints about finding the throughput per constraint unit. Wehave had this in every accounting textbook since the 1960s, butits not called throughput per constraint unit, its calledcontribution margin per constraint unit.Its the same concept and they know it and they know how tohandle it once they understand that thats what it is. But, its theterminology issue again, its confusing, to say the least. But, whatcan you do? You deal with it.Joe: Where is this all going? I mean, is throughput accountingbecoming more widely accepted or is it in kind of in a point that isjust sitting there and not going away? Where is throughputaccounting going right now? Developing Predictive Measures with Throughput Accounting Copyright Business901
  20. 20. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsCharlene: OK, on the latest content specification outline for theCPA exam, under one of their headings, under the operationspiece, they now have a requirement that candidates understandor at least have some familiarity with quality, with Lean, withTheory of Constraints and a couple of other things. So, its notthroughput accounting yet, but its making its place on the CPAexam. Now, the CPA new exam content becomes effective onJanuary 1, 2011, so thats about six or eight months from now.The Institute of Management Accountants, who controls andawards the CMA exam, thats a certified management accountantexam, now has both Theory of Constraints and ThroughputAccounting on their content specification outline. And thatshappening now.So, the professional bodies are recognizing Theory of Constraintsfor sure, and the Institute of Management Accountants hasrecognized Throughput Accounting. So, yeah, its becoming muchmore well-known and I hope it becomes much more practicedbecause its the only thing thats going to help our operationspeople know what to do.Joe: You talk about operations, how did this parlay into yourbackground in project management because you wrote twochapters in the TOC Handbook, one on finance and accounting,but the other was on project management, which I thought was apretty big step apart. How did these two flows together?Charlene: The more I got into management accounting andmanagement, the more I kept running across projectmanagement. My personal history was that I learned Theory ofConstraints Project Management first, thats critical chain projectmanagement. As a professor then I started trying to tell peopleabout it and they say "Thats not your field; youre not certified inanything dealing with project management." I had to get somecertification so that I would at least indicate to people that I knewsomething about which I was speaking, I then studied the Project Developing Predictive Measures with Throughput Accounting Copyright Business901
  21. 21. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsManagement Institute qualifications and criteria for their projectmanagement professional and got that designation. I startedlobbying my university to let me teach project management. Thattook about two years to convince them that I really had materialhere that students needed it and we needed to be teaching it.My dean allowed me to teach graduate project management. Itaught that for the last two years I was at the university andlearned a lot. You really learn things when youre teachingsomebody else and they start asking you all these questions thatyou hadnt even thought about. My students helped becomeproficient in project management.My husband, that Im currently married to, actually was a projectmanager and he was also a CFO of a couple of companies and heknew all about project management. So he wanted to write abook and we have co-authored now two editions, of earned valueproject management. Its accounting for project management. Ithas a lot of just plain project management concepts in it as well,including in the latest edition a chapter on critical chain projectmanagement. So, that was my transition.Joe: Is there anything I left out of the conversation youd like toadd, Charlene?Charlene: Oh, gosh, youve been pretty comprehensive abouteverything. The one thing I want to make sure that listenershear, if theyre not accounting people or even if they areaccounting people, is that accountants are very smart people andthey catch on really quickly, but you cant expect them to catchon when they dont know the rules of the game. My big push nowis to get every accounting person into training classes for allthese improvement initiatives, whether its lien, or quality ortheory of constraints or whatever. They will figure it out and theywill develop the metrics that are needed to let people know howtheyre doing real time. Developing Predictive Measures with Throughput Accounting Copyright Business901
  22. 22. Business901 Podcast TranscriptionImplementing Lean Marketing SystemsWe didnt even talk about this but theres a whole issue ofperformance evaluation. Im reading actually, a new book. Itsays, throw out the performance review, because it does nothingbut set people up for failure and bad feelings and everything elseand it doesnt help improve anything. He is absolutely correct. Inthe U.S., we have such an emphasis on individual performance,the hero effect I call it. You want somebody to dash in and savethe day and they get lots of kudos from the company andbonuses and whatnot, but that doesnt help the organization. Itpromotes a few individuals which are then treated with spitballsbehind their back by everybody else.When, in reality, you want a team working together and if youwant a team working together as you do in project management,you better figure out a way to evaluate the performance of theteam as well as the individual. I would put much more emphasison evaluating the team results and a little on the individualperformance.In fact, in my world, if I controlled the world sort of thing I wouldonly evaluate a team and then let the team evaluate themembers. The team also then would have the power andresponsibility to get rid of underperforming team members andfind some new ones. Everybodys performance goes down on ateam if you have some slackers.Joe: Whats next for you, Charlene? I mean, whats the directionthat youre taking?Charlene: Well, Im looking now at the whole process of change.My husband and I, who co-author nearly everything, this chapteron Critical Chain and the Theory of Constraints handbook was anexception to that. But were both looking at change, how youmake change happen, how you make it stick, how to make it lesspainful for everybody and how to get the best information in Developing Predictive Measures with Throughput Accounting Copyright Business901
  23. 23. Business901 Podcast TranscriptionImplementing Lean Marketing Systemsterms of what you need to do to make the change. So, thats mynext biggie.Joe: I appreciate hearing about that and keep me abreast ofthat. I want to thank you very much for being on the podcast.This podcast will be available on the Business901 website andalso the Business901 iTunes store. So, thank you, Charlene.Charlene: Well, you know I forgot we were doing an interview; Ithought we were just talking so you did a great job.Joe: Well, thanks a lot. I appreciate... Developing Predictive Measures with Throughput Accounting Copyright Business901
  24. 24. Business901 Podcast TranscriptionImplementing Lean Marketing Systems Joseph T. Dager Lean Six Sigma Black Belt Ph: 260-438-0411 Fax: 260-818-2022 Email: Web/Blog: Twitter: @business901 What others say: In the past 20 years, Joe and I have collaborated on many difficult issues. Joes ability to combine his expertise with "out of the box" thinking is unsurpassed. He has always delivered quickly, cost effectively and withingenuity. A brilliant mind that is always a pleasure to work with." James R.Joe Dager is President of Business901, a progressive company providingdirection in areas such as Lean Marketing, Product Marketing, ProductLaunches and Re-Launches. As a Lean Six Sigma Black Belt,Business901 provides and implements marketing, project and performanceplanning methodologies in small businesses. The simplicity of a singleflexible model will create clarity for your staff and as a result betterexecution. My goal is to allow you spend your time on the need versus theplan.An example of how we may work: Business901 could start with aconsulting style utilizing an individual from your organization or a virtualassistance that is well versed in our principles. We have capabilities toplug virtually any marketing function into your process immediately. Asproficiencies develop, Business901 moves into a coach’s role supporting theprocess as needed. The goal of implementing a system is that the processeswill become a habit and not an event. Business901 Podcast Opportunity Expert Status Developing Predictive Measures with Throughput Accounting Copyright Business901