Costing for Decision Making: Activity-based Costing vs. Theory of Constraints

By Anna Maria Moisello.

Published by The International Journal of Knowledge, Culture, and Change Management: Annual Review

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Article: Electronic $US5.00

The cost information quality is crucial for a wide range of short-term and long-term managerial decisions, in relation to different business functions. Effective decision making implies the adoption of an adequate costing tool that is able of highlighting the absorption of resources through the different choices. The aim of the paper is to reflect on the adequacy of Activity Based Costing (ABC) to inform the decision-making process and to show how to structure the costing model in order to get over its limits in short-term choices and in the presence of constraints. To this end, we confront Activity Based Costing with the Theory of Constraints (TOC): through the empirical and theoretical literature review we summarize the ABC vs. TOC debate and we evoke the strengths and weaknesses of the two methodologies in supporting decisions related to different time horizons. We show how to structure a flexible ABC model for the purpose of informing both long-term and short-term decisions.

Keywords: Activity-based Costing, Theory of Constraints, Product Cost

The International Journal of Knowledge, Culture and Change Management: Annual Review, Volume 12, 2012, pp.1-13. Article: Print (Spiral Bound). Article: Electronic (PDF File; 501.918KB).

Dr. Anna Maria Moisello

Researcher, Department of Economics and Business Sciences, University of Pavia, Pavia, Italy

I graduated in Economics at the University of Pavia (Italy). I received a doctorate in Business Economics and Administration from the Bocconi University of Milan (Italy). I am currently a researcher in Business Economics and Administration and my main research interests are management accounting and control. I currently teach “Business Economics and Administration” and “Management Control” in the faculty of Economics at the University of Pavia.