Learn how the Theory of Constraints (TOC) applies to supply chain cost accounting. Discover the key principles and benefits of using TOC for effective cost management.
Table of Contents
Question
Which of the following statements best represents a supply chain approach to cost accounting using the theory of constraints (TOC)?
A. It tends to only focus on the actual running costs of the constraint.
B. It forces cost reduction efforts on all operations because they all may become constraints.
C. It tends to not allocate overhead to costs, making the accounting closer to cash flow.
D. It tends to view all costs of poor quality as sunk costs for the entire operation.
Answer
C. It tends to not allocate overhead to costs, making the accounting closer to cash flow.
Explanation
The Theory of Constraints (TOC) in supply chain cost accounting focuses on managing constraints to optimize system throughput. TOC recognizes that every system has a limiting factor or constraint that determines its overall performance.
In TOC cost accounting, overhead costs are not allocated to individual products or operations. Instead, TOC considers most costs as operating expenses incurred to support the entire system’s throughput. This approach avoids the potential distortion caused by arbitrary overhead allocation and keeps the accounting closer to actual cash flow.
By not allocating overhead, TOC cost accounting provides a clearer picture of the financial impact of decisions on the system as a whole. This enables managers to make informed decisions that maximize throughput and profitability while effectively managing the constraints.
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