Integrating ABC and TOC for better manufacturing decision making

Abstract

This paper reviews and compares the concepts of theory of constraints (TOC) and activity‐based costing (ABC). The primary objective of this study is to investigate the integration of both theories so as to provide management with the capability of making better operations decisions in the presence of diverse activities and committed costs. First, the assumptions of each theory are discussed against traditional cost accounting. Next, based on numerical examples, we discuss the managerial implications of the two theories in various decisions such as pricing, make‐or‐buy and product mix. Numerical results show that both ABC and TOC can provide management with better performance measurement of diverse production activities especially when committed costs are a significant factor. Accordingly, suggestions for integrating the two theories are provided.