Database Reference
In-Depth Information
abandoned ABC entirely or localized it in isolated units or ceased updating their systems, which
left them with out-of-date and highly inaccurate estimates of the business process, product, and
customer costs.
Time-driven activity-based costing (TDABC) gives enterprises an elegant and practical option
for determining the cost and capacity utilization of their processes and the profitability of orders,
products, and customers. Based on this accurate and timely information, enterprises can priori-
tize for business process improvements, rationalize their offering variety and mix, price customer
orders, and manage customer relationships.
TDABC avoids the costly, time-consuming, error-prone, and subjective activity surveying task
of the conventional ABC by skipping the activity definition stage and, therefore, the very need to
estimate allocations of the departments' costs to the multiple activities performed by the depart-
ment (Robert Kaplan and Steven Anderson).
TDABC defines activity costs with only two parameters:
1. Capacity cost rate for the department executing the activity or transaction
2. Capacity usage time by each activity or transaction processed in the department
hus,
Activity-based cost
=
Capacity cost rate * Capacity usage time
where
Cost of capacity supplied
Practicalcapacityofresources supplied
Capacity cost rate
=
and
Cost of capacity supplied is the total cost of the department executing the activity or
transaction
Practical capacity of resources supplied is the actual time employees, machines, and equip-
ments perform productive work
Capacity usage time is observed or estimated time for performing the activity or transaction
Both of these parameters can be estimated and validated easily and objectively. These estimates
are not required to be precise; a rough accuracy is adequate. The cost of capacity includes the cost
of all the resources like personnel, supervision, equipment, and maintenance and technology that
are supplied to this department or business process. However, the practical capacity of resources
supplied is usually lower as compared to the rated capacity because it excludes the cost of unused
resources on account of scheduled breaks, training, meetings, setting time, maintenance, and so on.
Table 1.4 compares the conventional activity-based costing (ABC) and time-driven activity-
based costing (TDABC).
TDABC does not require the simplifying assumption, unlike that for the conventional ABC,
which all customer orders or transactions are the same and require the same amount of time for
the processing. TDABC is not only more accurate but also granular enough to capture the variety
and complexity of actual operations. For example, it allows time estimates to vary on the basis of
particular requirements of individual customers or orders such as manual or automated orders,
orders for fragile or hazardous goods, expedited orders, international orders, or orders from a new
