Throughput Accounting 1 · Lesson 3 of 6
Where the margins went
The plant made more money with the “least profitable” product. Find out why: the constraint, throughput per constraint minute, and what happens when finance makes the cost report more accurate.
Look at the money, not the margins
In the last lesson the plant made ₹600 more a week by going against the cost report. Where did the money come from? Look at what actually changes when you make one more unit:
- Sales go up by the price.
- Raw material goes up: ₹45 for P, ₹40 for Q. This is the only cost that truly varies with each unit.
- The ₹6,000 doesn’t change. Nobody is paid by the piece, and nobody is sent home if a unit isn’t made.
So each P adds ₹90 − ₹45 = ₹45, and each Q adds ₹100 − ₹40 = ₹60. This is throughput: the money a unit brings in, minus the costs that truly vary with it. By this measure Q still looks better, ₹60 against ₹45. So why did making P first win?
The constraint decides
Because the plant can’t make everything. Worker B is the constraint: every product competes for B’s 2,400 minutes, and every minute B spends on one product is a minute lost to the other. The question isn’t “how much does a unit earn?” but “how much does a minute of B earn?”
| P | Q | |
|---|---|---|
| Throughput per unit | ₹45 | ₹60 |
| Minutes on worker B | 15 | 30 |
| Throughput per B minute | ₹3 | ₹2 |
P earns ₹3 for every minute of the constraint; Q earns ₹2. So make all the P the market wants first, then use the rest of B’s time for Q: 100 P (1,500 minutes) and 30 Q (900 minutes). Throughput is ₹4,500 + ₹1,800 = ₹6,300, and net profit is ₹300.
This ranking has a name: throughput per constraint unit (T/CU). It is the rule for choosing a product mix whenever a constraint limits what you can sell.
Pause and think: the cost report gave Q a margin of ₹28.75 and P only ₹7.50. Which piece of information was missing?
- The correct raw material prices
- Q’s real selling price
- How long each product takes in total
- Which resource limits the plant, and how much of it each product uses
The cost report treats every minute of every worker as equally valuable, at ₹0.625. But a minute of worker A, who has 400 spare minutes, is worth nothing extra; a minute of worker B is worth ₹2 to ₹3 of throughput. Allocation can’t see the constraint, so it can’t rank products.
Why did the right plan look worse on paper?
There is another way to see it. Count the minutes the workers actually used:
- Q first (50 Q, 60 P): 2,500 + 3,600 = 6,100 minutes.
- P first (100 P, 30 Q): 6,000 + 1,500 = 7,500 minutes.
The ₹6,000 buys 9,600 minutes either way. The P-first plan simply turns more of those paid-for minutes into products customers buy. The cost report hid this, because it charges each product for its minutes as if unused minutes cost nothing.
A sharper report?
Finance sees the problem and tries to fix it: instead of spreading ₹6,000 over the 9,600 minutes available, spread it over the minutes actually worked. With 100 P and 30 Q, that’s 7,500 minutes, ₹0.80 a minute. Now P costs ₹45 + 60 × ₹0.80 = ₹93, more than its price.
Play it out. You’re running 100 P and 30 Q, and finance has a recommendation.
The death spiral
Nothing physical changed: same plant, same customers, same ₹6,000. Yet a “more accurate” allocation turned P from a winner into a loser. And if you follow it and drop P, the next report spreads the ₹6,000 over even fewer minutes, so Q starts to “lose money” too. Each round of following the report shrinks the business, until the report recommends closing it.
This is not a problem of choosing the wrong allocation basis. Any allocation of a fixed expense to products moves when the mix moves, so it can’t tell you what a decision will do to profit.
Cost accounting did not tell us which product contributes most to the company’s profit. We made more of the least profitable product, less of the most profitable one, and profit went up. The only logical conclusion is that there is an error in cost accounting.
Check your understanding
Answer all five. Get four right to complete the lesson.
1. Throughput per unit is…
- Price minus product cost
- Price minus all expenses
- Price minus truly variable cost
- The number of units made a week
For P: ₹90 − ₹45 = ₹45.
2. Why does P beat Q, even though Q has more throughput per unit?
- P earns ₹3 per minute of the constraint, Q only ₹2
- P sells for less
- P takes more total minutes
- Q uses more raw material
When the constraint limits sales, rank by throughput per constraint unit.
3. The P-first plan uses 7,500 worker minutes; the Q-first plan uses 6,100. Why does that matter?
- More minutes means higher wages
- Fewer minutes means less overtime
- It doesn’t matter
- The ₹6,000 buys 9,600 minutes either way; P-first turns more of them into sales
Unused minutes are paid for all the same.
4. When finance spreads overhead over the minutes actually worked, P “loses” ₹3 a unit. What should you do?
- Stop making P
- Keep the plan: nothing physical changed, so profit can’t change
- Raise P’s price to ₹93
- Make Q first
Dropping P loses ₹4,500 of throughput and saves no expense.
5. The death spiral happens because…
- Prices fall each month
- Workers slow down
- Dropping a product spreads the same fixed expense over fewer units, so the remaining products look worse
- Raw material prices rise
Each “fix” makes the next product look unprofitable.