The net incomes are different because the costs are allocated otherwise in the three methods.
In the standard-cost method. steel net incomes were a map of monetary values. costs and volume. Merchandise weight ( lbs ) was the primary unit of step for standard cost. which included stuffs. labour. direct fabrication disbursal and overhead cost classs. Direct stuff and direct labour are based on the measure of stuffs and routings. Direct fabrication costs were allocated to merchandises based on machine hours. Indirect fabrication and administrative costs were allocated to merchandises based on lbs produced. It averages the diverse resource usage by different merchandises.
The ABC followed a two phase methodological analysis by utilizing resource drivers and apportioning activities to merchandises and clients utilizing cost drivers appropriate to the activity. The stuff costs and direct labour are the same with the criterion cost method. All the indirect costs are related to the merchandise through a causal relationship. so the cost rates are different for different activities. In the criterion cost method. the cost rates for direct fabrication disbursals are the same for all the activities and fabrication and administrative operating expense is allocated equally among different merchandises.
TOC merely involves material costs. and all the operating expense costs are the same among different merchandises and fixed.
In ABC. the merchandise mix was decided on the footing of profitableness of each merchandise and the production of the most profitable merchandise was maximized. It doesn’t see the clip and the chance cost of using the constriction resources. TOC takes into consideration the consequence of the most critical resource in finalising the merchandise mix. It maximizes the merchandise which gives maximal net income on using one unit of the critical resource.
In Lehigh’s instance. Lehigh should non establish its merchandise mix determination on either ABC or TOC entirely. In the instance. the constriction procedure of each of the merchandise line is decided based on the machine clip. and the throughput per minute can be calculated based on the longest clip in the constriction resources. For illustration. the Die Steel Round saloon. the throughput is 0. 72. the clip it stays in refinement is 0. 1 proceedingss. The throughput per minute is 7. 2. When the constrictions exist. we must take steps to optimise because a constriction occurs when the demand for a resource. in a given clip period. outweighs the plant’s ability to present it. In the short tally. the production capacity is fixed and can non be changed.
To suit those restraints. the best manner is to utilize TOC. because ABC system doesn’t consider restraints and clip resources. A merchandise that consumes a big measure of the constriction resource is non penalized. But some of the merchandises which give upper limit throughput are non profitable harmonizing to the ABC system. ABC shows the profitableness of the merchandises. With both TOC and ABC information. we can place the restraint resources and send the most profitable merchandises through the restraint to maximise the net incomes. In the long tally. we need utilize the information to take steps to increase the capacity of the constriction to optimise the system.