MANAGING FIRM CONSTRAINTS WITH ACCOUNTING DECISION TECHNIQUES

This course develops a special topic within "Lean Accounting Methods," focusing on optimizing productivity (/ profitability) through constraint management methods. These methods, largely Goldratt's Theory of Constraints [TOC], have a large global following, although are not without its critics. It is a controversial area, making it all the more interesting, and relevant. TOC methods focus on direct action, with an emphasis on detecting and eliminating system constraints. Using a systematic, generally linear approach, TOC methods work toward firm optimization through short-term decision modelling. TOC shifts, and in some cases entirely eliminates, traditional financial reporting conventions. For example, absorption costing is not only disregarded, but considered the “enemy” (incongruent with decision optimization). Elements of variance reporting, activity-based costing, standard costing, and product cost reporting are among other traditional accounting areas that are bypassed in favour throughput analyses. Traditional inventory valuation methods are turned upside down. Inventory is considered a liability, not an asset. Reports that do not directly emphasize variable costs, throughput, operating efficiency, and profit-maximizing results are simply dropped. The result reshapes financial information into relevant, lean-based reports, targeting essential decision elements, and leading toward strategic decision outcomes.

The essence of lean accounting and TOC methods is a philosophy that postulates that the following three questions drive successful firm operations: “(1) what to change, (2) what to change to, and (3) how to cause the change.” Managerial accounting reports that target these issues provide the foundation for effective firm management and profit maximizing results. This course explores the foundations of lean accounting and TOC, then works toward developing a set of decision frameworks to facilitate answering those questions.