Product-Mix Decisions Under Activity-Based Costing With Resource Constraints And Non-proportional Activity Costs

Abstract

Companies adopting activity-based costing as a management and decision-making tools should be aware of its potential drawbacks. Activity-based costing relies heavily on the assumption of proportional activity cost structures. Further, it ignores resource and technological constraints. I argue in this article that both problems can be addressed through the integration of the activity-based costing with operational decisions based on Goldratts Theory of Constraints, (TOC). The proposed approach offers the added benefit of mitigating the short-run bias of the TOC approach in product-mix decisions.