TOC and Throughput Costing

The TOC focuses on improving a company’s profits by managing its operating constraints.
Companies that employ a TOC approach use a form of variable costing called throughput costing.

In throughput costing, an assumption is made that direct labor is a fixed cost rather than a variable cost. In many companies, it is quite accurate to say that direct labor behaves like a committed fixed cost in the short-run, not like a variable cost that adjusts to changes in output. The TOC has a shorttime focus; an assumption is made that all operating costs are fixed in the short- term and are therefore categorized as fixed costs. Throughput costing is an internal reporting tool.