Constraint‐based accounting and its impact on organizational performance: a simulation of four common business strategies

Since its inception, cost accounting has provided data to managers for the development of internal organizational performance measures. In the mid 1980s, Dr Eli Goldratt introduced a new management philosophy called the theory of constraints (TOC). This philosophy contained a new set of performance measures which linked together the strategic objectives and operational capabilities of the organization. This linkage allows for the maximization of profits. Since its introduction, there has been a growing amount of evidence documenting TOC’s ability to more tightly link local decisions to organizational performance than those of traditional cost accounting. This research used a simple Gedunken experiment to evaluate the difference between strategy driven product‐mix decisions based on TOC accounting and traditional cost accounting. In all cases, the constraint‐based approach to costing outperformed the traditional approach based on cost accounting.