Lehigh Steel

This is the first difference in assumption between Standard Costing and Activity-Based Costing.

Under Standard costing cost are assigned to products. That is, products cause cost.

However, Activity-Based Costing assumes that activities consume resources.

Second thing is about cost driver.

Standard Costing model employs a volume-based single cost driver,

such as direct labor hours, machine hours for the assignment of all manufacturing overhead cost.

That is the reason rate of overhead cost is 0.64$ for every product.

On the other hand, lots of levels of activities are considered as a cost driver.

An ABC model would have numerous cost pools in comparison to the standard costing system.

Furthermore, there are more assumptions of ABC.

Third is that cost pools are homogeneous. This means that each cost has only one activity.

Now we see the assumptions of TOC

First, The goal is to make money now and in the future.

Making money is the primary reason for a company to exist.

While ABC is intended as a long-term decision making tool.

The second state that throughput is used as a way to measure money.

Throughput is defined as revenues minus the variable cost of materials and energy.

In this, direct labors is not a variable cost

The third assumption is that there is always at least one constraint on each product that limit the company’s revenue.

Finally, There are three types of resources

- scarce bottleneck resources

- non-bottleneck resources,

- capacity constraint resources (CCR)

Then now we have another issue.

Which costing system is beneficial for Lehigh steel and what kinds of benefits we have.

It is the point that each system has its own benefits.

When comparing ABC with the TOC

it becomes clear that the cost paradigms are based on different time horizons—

ABC has a long run horizon, while the TOC has a short-run horizon.

It is assumed that in the short-run production capacity is fixed and cannot be readily...