We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is Constraints Accounting?

By Osmand Vitez
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Constraints accounting is a management accounting technique based on Eliyahu Goldratt’s theory of constraints. This technique involves the identification of constraints that limit a firm’s production output. The removal of constraints allows for higher production output and lower individual costs for goods and services. Constraints accounting is also known as throughput accounting. When a company achieves increased throughput, more profit is available for reinvesting into the firm, and unnecessary expenses should decrease through fewer constraints.

Goldratt’s theory of constraints contains five basic principles. Identify constraints, exploit the constraint in a positive manner, align the organization to support constraint decisions, break constraints when possible, and focus on continuous improvement. This process allows a company’s management team to decide the best approach for limiting constraints that will hamper the production process. Under constraints accounting, the focus is often on the financial constraints within a firm.

Three basic questions are present when applying the theory of constraints to constraints accounting: how to increase throughput, how to reduce investment, and how to reduce operating expenses. Throughput means producing more goods or services with the same level of inventory on hand. Improvements in product quality and skilled labor can often result in less waste and better throughput. Lower investment should be made in fixed costs. Variable costs allow for more money in the company’s coffers as capital is only spent when production occurs. All operating expenses outside of production materials should also remain low.

When focusing on constraints, companies should concentrate on those under their control. For example, constraints accounting cannot provide information for the lack of available credit, purchasing power of currency, threat of competitors, or government regulation. These factors are all external and may not be easily corrected by the firm. Companies should only attempt to remove the constraints within their own systems that hamper them from operating at maximum efficiency. The result should then be the lowest-cost goods or services that will provide the opportunity to increase overall profits.

Constraints accounting is not without its flaws. One flaw may be spending too much time on administrative tasks in favor of actually improving production processes. This results in potentially profitable ideas that never transfer to the actual production stage.

The opposite of this flaw is also possible. A company may completely overhaul their firm and then remain content with the initial changes. Inertia can then set in as the company fails to continue improvements. This can result in a major overhaul at a later time, increasing operating expenses.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.