Question

When comparing Activity-based costing (ABC) and the Theory of Constraints (TOC), the approach each method takes toward profitability analysis is:

Multiple Choice

• Both TOC and ABC take a short-term approach.

• TOC takes a long-term approach and ABC takes a short-term approach.

• Both TOC and ABC take a long-term approach.

• TOC takes a short-term approach and ABC takes a long-term approach.

Answer 1

Solution : Option D ( TOC takes short term approach and ABC takes long term approach)is the correct answer.

When comparing both TOC and ABC methods it is purely based on cost paradigms based on time period. The concept of short term and long term is based on capacity of production requirements.

It is assumed that in long term approach costs become more variable especially when spending and consumption are brought into alignment which makes activity based costing (ABC) more suitable.

It is assumed that in short term approach the production requirements are fixed and cannot be changed, due to which it creates bottlenecks which makes theory of constraints(TOC) more suitable.

This makes very much clear that the type of method to be used at various time horizons to assess towards profitability analysis.

Conclusion : From the above we can understand that OPTION D satisfies the given requirement in the question whereas remaining options A,B,C do not satisfy the given requirement in question.

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