Lehigh

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2.The profits are different because the costs are allocated differently in the three methods.

In the standard-cost method, steel profits were a function of prices, costs and volume. Product weight (pounds) was the primary unit of measure for standard cost, which included materials, labor, direct manufacturing expense and overhead cost categories. Direct material and direct labor are based on the bill of materials and routings. Direct manufacturing costs were allocated to products based on machine hours. Indirect manufacturing and administrative costs were allocated to products based on pounds produced. It averages the diverse resource use by different products.

The ABC followed a two stage methodology by using resource drivers and allocating activities to products and customers using cost drivers appropriate to the activity. The material costs and direct labor are the same with the standard cost method. All the indirect costs are related to the product through a causal relationship, so the cost rates are different for different activities. In the standard cost method, the cost rates for direct manufacturing expenses are the same for all the activities and manufacturing and administrative overhead is allocated evenly among different products.

TOC only involves material costs, and all the overhead costs are the same among different products and fixed.

3.In ABC, the product mix was decided on the basis of profitability of each product and the production of the most profitable product was maximized. It doesn’t consider the time and the opportunity cost of utilizing the bottleneck resources. TOC takes into consideration the effect of the most critical resource in finalizing the product mix. It maximizes the product which gives maximum profit on utilizing one unit of the critical resource.

In Lehigh’s case, Lehigh should not base its product mix decision on either ABC or TOC solely. In the case, the bottleneck process of each of the product line is...
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