Toc-Abc Summary

The TOC-ABC Choice Debate for Product Mix Decisions:

Introducing Asset Specificity as an Alternate Explanation

INTRODUCTION

Summary of Abstract

The researchers suggested the Asset Specificity is a better way instead of the long or short run comparison to decide whether ‘theory of constraints’ (TOC) or ‘activity-based costing’(ABC) is a better product mix decision for a firm in a particular period of time.

Summary of Introduction

In TOC, materials is one of the few variable costs in a firm while in ABC, most resources are variable costs. Besides that , in TOC , firms are advised to work hard to improve the bottleneck resource to maximize the overall throughput. In ABC, it suggested that firms should ignore the existence of the bottleneck because the unused resources are charged as cost of excess capacity.

The main purpose of TOC is to optimize production by manipulating the constraints thus obtaining higher throughput. The objective of ABC is to increase the accuracy of product costs. TOC reduces the inefficiency in constraining resources to enhance the throughput hence making it through-put driven. ABC transforms the cost of most resources to product costs ignoring whether it is a bottleneck or not.

In short–term, most costs are stable and less variable. Firms choose the more suitable TOC during short-term run, making TOC the short-term technique. In long term, most costs has become unstable causing firms to choose ABC instead of TOC because most costs are variable under ABC. Thus, ABC is the long-term technique. Although the two techniques can be used parallel, but the firms face difficulties in making the choice for product mix decision.

The researchers suggest that if a product mix has one or more asset specific products, a firm is more likely to choose ABC and the choice is relevant when bottleneck do not exist in a firm. The researchers has propose the integrated TOC-ABC choice based on the need of the firms to manage bottlenecks and...