ABC or TOC? The Differences between Activity Based Costing and the Theory of Constraints
Anneke Zwart, Student (University), Netherlands, Moderator
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 organiza...