A comparative analysis of utilizing activity-based costing and the theory of constraints for making product-mix decisions

Activity-based costing (ABC) and the theory of constraints (TOC) represent alternative paradigms for evaluating the economic consequences of productio n-related decisions. However, their application can lead to contradictory p roduct-mix decisions. To resolve this conflict, it is frequently suggested that the TOC is appropriate for the short run, while ABC is appropriate for the longer term. This paper models the selection of a product mix with the TOC and an ABC model integrating activity-based cost with the capacity of production-related activities. The paper demonstrates that management's dis cretionary power over labor and overhead resources determines when the TOC and ABC lead to optimal product-mix decision. Equally important, it demonst rates that both the TOC and ABC may lead to a suboptimal product mix across a wide range of economic conditions. The paper develops a more general mod el of the product-mix decision and demonstrates that the TOC and ABC are sp ecial cases of this model. Finally, the paper discusses how the general mod el may be used to supplement information provided by the TOC and ABC. (C) 2 000 Elsevier Science B.V. All rights reserved.