Activity-Based Costing And The Theory Of Constraints: Using Time Horizons To Resolve Two Alternative Concepts Of Product Cost

Abstract

Activity-based costing and the Theory of Constraints have generated a substantial literature that reflects the importance of these topics with practitioners. These two methods appear to represent conflicting viewpoints of product cost. Rather than trying to resolve the question of whos right, each method is examined with respect to its implicit assumptions about time horizons. The Theory of Constraints emerges as a short-run decision tool while Activity-Based Costing has its primary application in strategic planning and control. The problems associated with these methods if time horizons change are examined and suggestions for an integrated approach incorporating elements of both methods are presented.