Review: Throughput Accounting vs. Throughput Accounting

Been to busy to blog again, but I have been reading. For some time now, I have been studying whatever material I can lay my hands on about Throughput Accounting (TA). TA is a management accounting system that is based on the Theory Of Constraints (TOC).

Who needs another accounting model? Just about everyone, it turns out, because the standard model, GAAP Accounting (Cost Accounting), is so fraught with problems it is positively dangerous. Though GAAP accounting works sometimes, it does not always come up with the right answers. TA is a more reliable alternative.

This review covers not one, but two TA books, the recently published Throughput Accounting by Stephen Bragg, and Thomas Corbett's Throughput Accounting, from 1999. (Yes, they have the same title.)

In the book Throughput Accounting: A Guide to Constraint Management, Stephen Bragg explains how TA works, and he does it very well. The focus is on accounting for manufacturing companies. Thus, some of the specifics are not directly applicable to the software industry. However, all the principles are.

The book discusses not only the basics of TA, but also how to use TA for performance measurement and reporting. Bragg also discusses the differences between TA and GAAP Accounting financial statements, and how to construct an accounting system that uses TA for reporting to management, and GAAP Accounting for external reports.

If there is one weakness in the book, it is that Bragg asks the reader to just accept the TA view of a company. He does not prove GAAP Accounting wrong, at least not from the start.
For me, this was not a problem. I have read up on TA before, and have used it in my work when doing financial analysis, and when I have modeled project value streams. For a reader with a background in GAAP Accounting, it might be harder to make the switch to the TA system.

Nevertheless, this is my favorite TA book, though I would advice anyone without previous TOC or TA experience to also read Throughput Accounting, by Thomas Corbett. Corbett spends a lot more energy describing what is wrong with standard GAAP Accounting before offering TA as an alternative.

Corbett's book does not cover quite the range that Bragg's book does, so I'm glad I have read both. Even if you have read one, the other will contribute something of value. When working through the examples in Corbett's book, I found one minor error, but as the end result was correct, I believe it is a typo, not an error in the calculations.

Both books are worth longer reviews, but as both are fairly short, there is an alternative to reading a comprehensive review: read the books!

Comments

Post a Comment

Popular posts from this blog

Waterfall vs. Agile: Battle of the Dunces or A Race to the Bottom?

Image
The major software methodology wars since the mid 1950’s. Someone was wrong on the Internet, so here we go… In a recent HBR article, It’s Time to End the Battle Between Waterfall and Agile , the author sets up a false premise: There is a war between Waterfall methodology and Agile. The war must end. And finally, you can combine the approaches to get the best of both worlds. This sounds good, but the article is based on a misunderstanding of both Waterfall and Agile. Also, there is no war between Waterfall methodology and Agile. There can’t be, because Waterfall methodology does not exist! Waterfall is a name for large projects that failed in the 1960’s. Waterfall was never a methodology, but a failure to apply the methodologies that existed back then. As I will show towards the end of this article, at least one of the “successful” Waterfall projects mentioned in the HBR article was neither successful, nor a Waterfall project. I got invaluable help from Alistair Cockburn. He fact che...
Read more

Performance Evaluations, Business Strategy, and Agile Methodologies

Image
It is performance evaluation time in many companies. This can be stressful, both to the people being evaluated, and the people doing the evaluation. In companies adopting agile software development methods, the tension can be extraordinary. Individual performance evaluations run counter to agile philosophy, which emphasizes team performance over individual performance. However, managers and corporate leaders need to take a few steps back, and consider the impact performance evaluations have on the organization as a whole. Especially now, in the midst of a recession, it is important to look at a companies current policies to see if they can be improved, or if they are actually holding the company back. So, how can a manager evaluate policy? Performance evaluation policies can serve as an excellent example. I'll confine myself to discussing the so-called ‘rank and yank’ methods. These are performance reviews were employees are ranked using a forced ranking system. It usually looks so...
Read more

Agile Requirements Structures, Part 1

Image
If you have worked in large Agile projects or programs, you may have noticed that there is often quite a bit of confusion about requirements, what the requirement types are, their purpose, how to write them, how to use them, and above all, what not to do with them. There are many causes for this confusion. Here are some of the more common I have seen: Nobody in the organization has read up on the requirements model it is using, so everyone makes their own interpretation. The organization deviates from a standard requirements model, but nobody knows which standard model the organization is deviating from, and/or there is no agreement about how they deviate from it. The organization has not documented its own requirements model very well. The organization mixes two or more different requirements models, often without realizing it. The organization has documented its requirements model, but finding the documentation is an epic project in itself, on par with when Henry Sta...
Read more