TVC conceptually is a new term and differs in its content from the content of the conventional term “variable cost”.

TVC is the cost of raw materials, components and direct paid services for production of products to be sold or the cost of products bought for reselling.

TVC is the cost that grows directly proportionally to the sales of every additional unit of the product:
• the cost of buying additional raw material/components/product
• subcontracting
• such costs as, for example, commissions paid to an agent that are calculated according to the amount of units sold, etc.

Costs that the company would incur irrespective of the number of units – like the pay for the direct labor that is on regular salaries (not piece incentive), salaries for directors/managers/secretaries, telephone bills, electricity bills, premises rent, etc. – are treated as operating expense and are not deducted from the revenue for the calculation of Throughput for a certain period.

Throughput

For commercial organizations Throughput is defined as:

The rate at which the system generates money through sales. Throughput is the difference between the selling price (P) and the Totally Variable Cost (TVC).

T = P – TVC

For non for profit organizations Throughput is defined as:

The rate at which the organization generates goal units.

 

Source: Oded Cohen and Jelena Fedurko, Theory of Constraints Fundamentals, 2012