StudentShare solutions
Triangle menu

Use the Theory of Constraints and Activity-Based Costing to Determine the Optimal Product Mix Decisions - Essay Example

Not dowloaded yet

Extract of sample
Use the Theory of Constraints and Activity-Based Costing to Determine the Optimal Product Mix Decisions

Broadly, expanded ABC approach, TOC based approach and the multi-factor approaches have been discussed which have deeper implications in designing an optimal product mix for a manufacturing entity.
Expanded ABC based Model The shortcomings of traditional costing to incorporate production process are mainly encompassed by Theory of Constraints (TOC) and Activity Based Costing (ABC). Production decisions become quite convenient when they are facilitated by the paradigms of TOC and ABC gelling together (Kee). Apparently it seemed as if the both of these paradigms have the nature of competing with each other in assisting production decisions.
However, later on when their strengths and limitations were analyzed, a complementary view of both the paradigms came into effect. If the product cost obtained under ABC, is incorporated with the availability of the physical resources, a comprehensive model of production process can be developed which can facilitate the production decisions by implementing the principles and guidelines of the Theory of Constraints. Mixed-integer programming is the framework which is used to integrate the product cost estimated under ABC with the availability of physical resources along with the production capacities. The major benefit provided by the mixed-integer programming is the effectiveness of decisions relating to marketing and production. With the help of the expanded model of ABC, a firm can evaluate simultaneous results of product cost, availability of physical resources and the marketing opportunities in order to identify an optimal product mix. The other major benefit of expanded ABC program includes the identification of bottleneck resources and their economic impacts upon the firm’s production process. Identification of excess resources is also a hallmark for the expanded ABC approach due to which those excess resources can be deployed elsewhere to enhance the overall productivity of the firm. Lastly, the program for continuous improvement can also be identified and applied which can enhance the potential productivity and profitability of the firm because of the implementation of expanded ABC approach. Besides the advantages of the expanded ABC approach, there are different sorts of limitations attached with the implementation of this approach. Expanded ABC approach takes into consideration the quantitative effects of the revenues, product cost, availability of resources and the production capabilities. However, in order to design an optimal product mix, qualitative factors also play their significant part over which the expanded ABC approach remains silent. As a result, expanded ABC approach barely manages to provide only partial information regarding the marketing and the production decisions. Another limitation of expanded ABC is the usefulness of the reliance of this approach towards estimates and assumptions regarding the business activities of the firm over a certain time period. There is a strong dependency of the usefulness of the decisions taken under expanded ABC approach on the accuracy of the estimates and assumptions used by the firm. Lastly, the cost of implementing expanded ABC model can turn out to be on a higher side because of the substantial amount of time and effort required in its implementation, analysis of the results inferred from the mixed-integer programming and other related activities. However, it is important to note that the cost of ...Show more

Summary

Use the Theory of Constraints and Activity-Based Costing to Determine the Optimal Product Mix Decisions Introduction Among all of the manufacturing industries, most of the efforts are drawn in order to develop such a product mix which should be optimal in nature…
Author : pietromosciski
Use the Theory of Constraints and Activity-Based Costing to Determine the Optimal Product Mix Decisions essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Use the Theory of Constraints and Activity-Based Costing to Determine the Optimal Product Mix Decisions"
with a personal 20% discount.
Grab the best paper

Related Essays

Activity based costing
The main objective of this type of system is proper identification of all cost categories and using basing decisions on this information. Most organizations that use ABC systems have two costing systems – the official costing system that is used for preparing external financial reports
6 pages (1500 words) Essay
Activity Based Costing
Based on the activity based costing (ABC) method, the company should increase the number of department stores, as part of its expansion strategy (Chakraborty, 2004). This is because, unlike the direct simple costing method, the activity based costing (ABC) has a higher level of accuracy.
4 pages (1000 words) Essay
Activity based costing profitability
Direct labour and material cost is calculated simply by multiplying the variable cost per unit by number of units. Overheads related to production for each type of product are found as follows:Further on, all the costs acquired, both fixed and variable are summed up to show the full cost of the product.
5 pages (1250 words) Essay
Activity Based Costing
Activity Based Costing (ABC) is a common procedure normally most of the organizations adopted to determine the price of their products or services. Both indirect and direct costs of manufacturing will be considered while calculating the unit price. This method proved to be an effective way to determine the true cost of a product or service.
10 pages (2500 words) Essay
Activity Based Costing
Accountants have always paid close attention to costs, since this variable provides a basis that is utilized throughout the entire accounting information system. In a manufacturing firm labor and materials have always been cost
7 pages (1750 words) Essay
Product Costing - Traditional Methods and Activity Based Costing case assignment 5 accounting
A focus on the schematic relations of the centres as well as discussion of the allocation and criteria relating the same have also been
3 pages (750 words) Essay
Activity Based Costing
Human resources constitute the backbone of any big business. From planning to ultimate implementation, it is the personnel who control and handle every single process and activity. At
3 pages (750 words) Essay
Management Accounting & Activity Based Costing
62-79). In the case study presented, the activities for the division include manufacturing of the products using similar, expensive and complex molding machines, with each machine producing three product lines.
2 pages (500 words) Essay
Activity Based Costing
Development of ABC has led to a positive change in productivity. This is due to its ability in the identification of inefficient products, allocation of more profits on
1 pages (250 words) Essay
Activity-Based Costing vs Traditional Costing
Conversely, the traditional method of costing allocates cost at an average rate to all product-based products. The traditional method brings together any price that are indirect in the production and equally implements the costs across the board through employing one applicable cost driver, for instance, the machine hours.
1 pages (250 words) Essay
Get a custom paper written
by a pro under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
YOUR PRIZE:
Apply my DISCOUNT
Comments (0)
Rate this paper:
Thank you! Your comment has been sent and will be posted after moderation