Using activity based costing and theory of constraints in optimal product mix selection

Determining optimal product mix is very important to increase the profitability offirms, although the traditional methods are inadequate in these decisions. Newtechniques which have been developed for this purpose can create moreprofitable solutions. Although theory of constraints seems similar to thetraditional variable costing, it differs in recognizing only the material cost asvariable. Optimal product mix decision, which is determined by concentrating ontheory of constraint?s throughput approach can provide more profitable solutionsthan traditional methods. On the other hand, with activity based costing whichprovides more accurate product costs than those of traditional methods,profitable product mix can be determined by concentrating on resource usage.Moreover, using activity based costing and theory of constraints together in theoptimal product mix decisions, firms can acquire higher profits. The aim of thisstudy is to emphasize the importance of the optimal product mix decisions toincrease firms? profit and expose the importance of integrating activity basedcosting and theory of constraints in making rational and profitable product mixdecisions. In this framework, descriptive and exploratory case studies wereapplied in a manufacturing firm. First, existing production and cost systems ofthe selected firm were defined by a descriptive case study; and then using anexploratory case study, it was showed that how profitability of the firm wasaffected by the product mix which is determined through the integration of theboth theory of constraints and activity based costing.Key Words: Activity Based Costing, Theory of Constraints, Optimal ProductMix.