1. Introduction and Objectives
Once a product enters mass production, cost management shifts toward continuous optimization. This lesson covers Kaizen Costing and Eliyahu Goldratt’s Theory of Constraints (ToC) to optimize production workflows.
 
2. Kaizen Costing Principles
Unlike standard costing, which keeps targets fixed for an entire budget year, Kaizen costing applies continuous, small cost-reduction targets every single month. It assumes that production workflows can always be made more efficient by eliminating minor wastes (muda) directly on the shop floor.
 
3. The Theory of Constraints (ToC) Cost Framework
The Theory of Constraints argues that every manufacturing facility has a single bottleneck or constraint that limits its overall output volume. To maximize profitability, management accountants shift from traditional absorption metrics to Throughput Accounting, which focuses on three core variables:
               ┌──────────────────────────────────────────────┐
               │    THROUGHPUT (T) = Sales Revenue - Materials │
               └──────────────────────┬───────────────────────┘
                                      │
         ┌────────────────────────────┴────────────────────────────┐
         ▼                                                         ▼
[ Investment / Inventory (I) ]                            [ Operating Expenses (OE) ]
• Capital locked up in raw materials,                     • All cash spent to turn inventory 
  WIP, and physical machinery assets.                       into Throughput (Labor, Overhead).

Under Throughput Accounting, the primary goal is to maximize Throughput (T) by optimizing flow through the bottleneck machine, while simultaneously reducing Inventory (I) and controlling Operating Expenses (OE).
 
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