 Show Who Wins in a Dynamic World: Theory of Constraints vs. Activity-Based Costing? Cooper, Bray and Parzen (2007) Introduction -Value chain analysis serves as a powerful tool for economic planning oCategorizing the value-adding activities of an organizational system oIlluminating areas most likely to increase profitable outcomes -Value chain identifies the value and cost drivers for each activity performed by an organization oStrives to maximize aggregate value creation and minimize costs internal to an organization oTwo views: TOC & ABC -According to TOC approach, identifying and addressing these constraints facilitates successful management choices regarding optimization of an organizational system -According to ABC, identifying the causal relationships behind the costs of a profit-making organization facilitates cost assessment more optimally oIlluminates areas of high overhead costs for management to consider and adjust Hypothesis: ABC more optimal in a dynamic world where volume and costs vary Hypothesis: ABC (bottom-up) more agile and less limiting than the “top-down” constraint- identifying tact associated with the TOC approach. oWith regards to organizational systems, “Bottom-up” approaches are more resilient to volatility Experiment 1: TOC vs ABC ABC always generated more profit than the TOC approach did in a dynamic world However, TOC produced a larger amount of revenue oTOC approach identifies and addresses system constraints, maximizing revenue received -TOC maximises revenue at the expense of increasing costs, such that profit is no longer larger than the orders the ABC approach would have accepted if faced with the same choices oABC generates lower revenue, but smaller costs and consequently larger profit TOC treats operating expenses as fixed while ABC treats operating expenses as variable oIn a dynamic world, operating expense vary by a greater amount than revenue Implications A hybrid TOC+ABC approach is the most optimal strategy to adopt for long-term value chains oOptimal feature of TOC approach aid by selecting the first cut of orders that will generate the highest revenues oOptimal feature of ABC approach aid by selecting the orders that have the lowest costs and thus highest profit Firms need to be more agile at either adopting or ceasing activities dependent upon their profit vs. associated costs oFirms becoming less vertically structured and more market based What is the main difference between activityTOC is useful for decisions requiring short-run accounting information. ABC information provides estimates of the long-run cost of organizational activities and cost objects, which can be useful for long-term decisions. The TOC and ABC models, therefore, are complementary rather than conflicting.
What is the difference between activityWhereas activity-based management focuses on business processes and managerial activities driving organizational business goals, activity-based costing seeks to identify and reduce cost drivers by optimizing resources.
What is the difference between activityOne of the key differences between Standard costing and ABC is the method of overhead cost allocation. Standard costing allocates the overheads based on direct labor usage for each unit that is produced. On the contrary, overhead cost allocation in the ABC system is based on level and resource usage of each activity.
What is the difference between product costing and activityProduct-based costing is a relatively simple form of allocating direct and indirect costs to individual units of product. Activity-based costing is a more intricate system that assigns costs to activity centers rather than the products produced by those activities.
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What is the main difference between Activity Based Costing and the theory of constraints?
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