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