Software theory

Unfortunately, TA has gained a bad reputation mostly within the circles of accounting professionals, mostly due to the fierce position taken by Goldratt against traditional accounting practices. Besides, the politics, the reputation is undeserved, as we will see. TA can truly be added to the arsenal of management tools, often with spectacular effects on the bottom line. Originally, it was the need to manage business system in a more scientific way that led to the creation of TA.

In fact, TA is defined by a few simple formulas , that might somehow remind of the equations one finds in physics. With only three variables to consider, TA becomes accessible to and usable by non-accounting professionals. Decision-making is simplified. Since TOC is concerned about producing the maximum result with the minimum effort, a leveraging priority is defined among those three variables. One should favor, in order:.

Notice that this priority is contrary to what is customary in conventional cost accounting, which favors cost reduction above anything else.

One key tenet of TOC is this: Reducing cost is limited, while increasing throughput is potentially unlimited. The order of focusing in TA is the opposite than that which is assumed in traditional CA, where focus is on reducing cost, while any consideration about increasing throughput is left last. This is another technical reason why TA is at odds with the CA. This kind of thinking leads companies to seek local optimizations i. TOC focuses optimization efforts only on the CCR, because TOC maintains a system-thinking view and aims at improving the economic performance of the business as a whole.

With focus on the constraint, TOC and TA favor optimizing the performance of one resource at a time, and not of all resources all the time. The analogy of the chain illustrates this. The whole chain gets stronger only by strengthening the weakest link. When focus is on throughput, you have to adopt a systems-thinking view, which is hindered by traditional CA.

Minimizing overall resource utilization and unit product cost become the last resort, and not the first, as it is dictated by CA.

Nowhere is it written […] that the same information used for GAAP must be used to make management decisions. In reality TA is not really new. Throughput Accounting just renders practical an abstract accounting idea. Therefore: use CA for external reporting requirements, but TA for making management decisions. Other tools of TOC contribute to more operational and logical aspects. A significant corollary follows: TA is part of generally accepted accounting theory, and it can be reconciled with the GAAP for customary external reporting needs.

The contra-position between TA and CA is more political than actual. The contra-position has been sustained even through technical arguments. In particular, because traditional CA provides artificial incentives to build inventories.

This is the technical reason why TA has been badly accepted by traditional accounting professionals. CA values inventory as a positive asset, while the TA considers inventory as a negative liability indicating a weakness or even a dysfunction in the whole organization.

WIP and Inventory are negative liabilities. They limit throughput and are indicative of deeper organizational and work-flow problems. The duality is more artificial than real, and is also simple to reconcile. This approach is known by every CPA […] that deals with small manufacturing firms that supposedly have not been sophisticated enough […] to track overhead by product on a daily, hourly, or minute basis.

The variance reporting that is generated at the end of every month, purported to control costs, is not useful or timely and actually puts departments into conflict with each other and the overall goal of maximizing throughput at a minimum cash outflow. The important conclusion? There is no contradiction.

Reconciling TA with CA is a simple accounting exercise any trained accountant can perform. The real challenge is often in making the accountants appreciate the overall operational benefit, and true bottom line impact of this approach.

A lesser challenge is recognizing that TOC uses a different terminology for concepts which are instead well known in traditional accounting. Software engineering is intangible, while the origins of TOC are from the very tangible manufacturing industries. Note: Ricketts also defines a more extensive Throughput Accounting for Software Businesses covering sales and research in addition to software engineering proper, and also distinguishing between selling a software product and a software service.

He further distinguishes between TA for software engineering and other intangible service businesses which are different because more labor based, and less automated and reusable. For this discussion, TA for software engineering alone is sufficient. Throughput : TE is the rate of cash generated through delivery of working code into production […] It is computed as sales price minus direct costs, such as packaging, delivery, installation, training, support, and networking. Investment : I is all money invested in software production systems plus money spent to obtain ideas for client-valued functionality.

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Also consider: Systems, Theoretical CS. Information Retrieval and Web Search. Individuals embody cultural software: they are literally information made flesh.

They spread it to others through communication and social learning. Human minds and institutions provide the ecology in which cultural software grows, thrives, and develops. Ideology is not a special or deviant pathology of thinking but arises from the ordinary mechanisms of human thought. Because cultural understanding is the product of evolution, it is always a patchwork quilt of older imperfect tools of understanding continually readapted to solve new problems.

As a result human understanding is always partly adequate and partly inadequate to understanding and to the pursuit of justice.

Cultural Software offers examples drawn from many different disciplines showing how ideological effects arise and how they contribute to injustice. The book also tackles the problem of mutual understanding between different world views.