Use the Theory of Constraints and Activity-Based Costing to Determine Essay

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