Costing for Decision Making: Activity-based Costing vs. Theory of Constraints

The cost information quality is crucial for a wide range of short-term and long-term
managerial decisions, in relation to different business functions. Effective decision making implies
the adoption of an adequate costing tool that is able of highlighting the absorption of resources
through the different choices. The aim of the paper is to reflect on the adequacy of Activity
Based Costing (ABC) to inform the decision-making process and to show how to structure the
costing model in order to get over its limits in short-term choices and in the presence of con-
straints. To this end, we confront Activity Based Costing with the Theory of Constraints (TOC):
through the empirical and theoretical literature review we summarize the ABC vs. TOC debate
and we evoke the strengths and weaknesses of the two methodologies in supporting decisions
related to different time horizons. We show how to structure a flexible ABC model for the
purpose of informing both long-term and short-term decisions.