Essay: The Importance of Theory of Constraints

Essay: The Importance of Theory of Constraints
13/04/2011 Comments Off on Essay: The Importance of Theory of Constraints Academic Papers on Business Studies,Sample Academic Papers admin

Sample Essay

The Theory of Constraints (TOC) is a management tool that supports continuous improvement and cost management programs. The Theory of Constraints states that often in the system there is at least one constraint that restricts the system from achieving higher success. The idea of TOC is to identify that constraint in the system and then seek a solution to relieve that constraint. The activity based accounting is based on the principle of attaching a cost to each activity on the basis of an identified cost driver.

A bottleneck in each activity affects the cost driver, driving the cost up for those activities. The TOS identifies several ways that the management can use to minimize the bottleneck. It can simply outsource all or part of bottleneck operations, Invest in additional production equipment, implement overtime work at bottleneck operation, retraining of employees or remove any non-added-activity at the bottleneck operation. Regarding inventory management, The TOC considers holding inventory as a liability for an organization. It signifies that excess inventory negatively affects quality, new product introduction, equipment, space and responsiveness to the market (Hilton, 1997).

Categories of Costs and Their Applications

In managerial accounting, there are different ways to classify costs for different purposes. They can be classified based on their management function, their ease of traceability, timing of charges against sales revenues, their behavior according to change activities and their relevance to control and decision making. Costs by management functions can be further classified into cost associated with manufacturing activities and with selling, general and administrative expenses of the company. Costs classified on the basis of ease of traceability can be broken down into cost directly traceable to costing object and cost which cannot be. Factory overhead items are considered to incur indirect costs. Cost classified against their timing of charges against sales revenue can be classified as product cost and period cost. Product costs are identified as part of the inventory at hand. All manufacturing costs are also considered product cost. Selling, general, administrative costs are also classified as a period cost. Costs classified according to their behavior to change activities are classified into a variable cost, fixed cost and semi-variable cost. Variable cost varies in total in direct proportion to changes in activity such direct materials and gasoline expenses. Fixed costs do not vary with change in activity. In accounting rent, insurance and taxes are considered fixed activity. Semi-variable costs cost those vary with change in volume, but, unlike variable cost do not vary in direct proportion (Kim & Siegel, 1998).

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