The throughput accounting ratio compares Throughput with factory costs. For this purpose, Throughput is calculated by deducting direct material cost from the sales/revenue, the business earns by selling this product.
Let’s understand this ratio using the following example.
| Description | Product-A |
| Sales price (A) | $20 |
| Direct material cost (B) | $10 |
| Throughput per unit =(A-B) | $10 |
| Scarce resource (Machine hours) (D) | 2 |
| Throughput/scarce hour (C/D) | $5/scarce resource |
| Factory cost per machine hour | $4/scare resource |
Throughput ratio formula = Throughput per scarce resource/factory cost per scarce resource
Throughput ratio = $5/ $4
Throughput ratio = 1.25
Interpretation
This ratio is more than one, which means the throughput return is sufficient to cover the factory cost. Hence, the business can proceed with the production of this product plan.
On the other hand, if the throughput accounting ratio is less than one, it indicates that the product is not profitable and will not be able to cover the factory cost. Hence, the production decision will lead to a loss for the business.
Wrap up
The throughput accounting ratio compares the return on Throughput with the factory cost. If the throughput return per scarce resource is higher than the factory cost per scarce resource, it indicates product mix profitability and vice versa.
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