ABC or TOC? The Differences between Activity Based Costing and the Theory of Constraints

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Anneke Zwart
Student (University), Netherlands

ABC or TOC? The Differences between Activity Based Costing and the Theory of Constraints

In past literature, the Theory of Constraints (TOC) has been seen as more or less contradicting the concept of ABC-costing and its assumptions.
The main contradictions between ABC and TOC mentioned in those studies are:
1. Variable costs: While the Theory of Constraints (TOC) assumes that there exist few variable costs in an organization, ABC-costing assumes the largest part of a companies’ resources are variable ones. It is for this reasons that the TOC is seen by some as a short-term technique, and ABC-costing as a long-term one.
2. Bottlenecks Resources:
- The TOC argues that constraining resources or the outputs with the lowest capacity should be improved. In other words, the bottleneck resources that cause the highest costs in a company should be improved so as to maximize efficiency.
- ABC-costing, however, implicitly assumes no bottleneck resources to be present in an organization, but rather certain activities are seen as barriers. In ABC-costing, total resources purchased should be equivalent to consumption of cost objects and thus activities; anything that is left should be charged to excess capacity costs.

Reasons for these Contradictions between ABC and TOC
According to Shridharan et al. (2009), the reason for these differences in TOC and ABC can be found in the contradicting purposes of both concepts:
- TOC focuses on maximizing efficiency and thus raise output by the management of constraints/costs
- ABC-costing is about systematic allocating costs to certain activities consumed by the product so as to increase product cost accuracy

Source: Shridharan, V.G., Krishnan, R., Vergauwen, P. And T. Arthanari. (2009). “The TOC-ABC Choice Debate for Product Mix Decisions: Introducing Asset Specificity as an Alternate Explanation.“ Journal of Global Business Issues.

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