The TOC-ABC choice debate for product mix decisions : introducing asset specificity as an alternate explanation

Abstract

Though constructed with different purposes, the theory of constraints and activity based costing systems pose a choice problem in respect of product mix decisions. We believe that the existing explanation of short versus long run criterion to explain firms\u27 choice between these two systems is incomplete and offer an alternate explanation based on asset specificity. We argue that the extent to which specialized resources are deployed to make products in a mix determines the choice. We present a 2*2 matrix stating that when asset specificity is high, a firm is likely to choose ABC instead of TOC since ABC makes a large portion of costs visible to enable control. However, the choice is likely to be a TOC-ABC combination when the manufacture of asset specific products is also constrained by bottlenecks.<br /