Compare and contrast the theory of constraints and activity based costing. Which is more useful in short-run and long-run management of costs?

What will be an ideal response?

Answer: The theory of constraints emphasizes management of bottleneck operations as the key to improving performance of production operations as a whole. It focuses on short-run maximization of contribution margin. Because TOC regards operating costs as difficult to change in the short run, it does not identify individual activities and drivers of costs. Therefore, TOC is more useful for the short-run management of costs.
In contrast, activity based costing (ABC) systems take a long-run perspective and focus on improving processes by eliminating non-value-added activities and reducing the costs of performing value-added activities. ABC systems are therefore more useful than TOC for long-run pricing, cost control, and capacity management. The short-run TOC emphasis on maximizing contribution margin by managing bottlenecks complements the long-run strategic-cost-management focus of ABC.