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.