The article introduces Time-Driven Activity-Based Costing (TD-ABC), a simplified version of traditional ABC that uses time estimates to allocate costs more efficiently. It highlights how this method addresses the limitations of conventional ABC, making it more practical and adaptable for complex organizations.
Time-Driven Activity-Based Costing
A version of ABC which works on estimating time rather than identifying cost drivers through lengthy surveys or interviews.
Following the many criticisms of traditional ABC, including cost, design problems, and maintenance issues, Kaplan and Anderson (2004) provided an analysis of how ABC could be used in practice to overcome some of these issues. They introduced time-driven activity-based costing (TD-ABC).
TD-ABC simplifies the ABC process, resulting in the process becoming more suitable for complex organizations. TD-ABC does not require individual employees to carry out detailed and complicated surveys to track the use of resources. Instead, TD-ABC relies more on managerial estimates; it bypasses the stage of allocating resources to activities.
Managerial estimates can be used to identify two key components of these systems:
- The cost time unit of supplying each resource
- The unit time of consumption of each resource by cost object.
Managers estimate how much time each resource has in theory and then estimates how much time is actually available in practice. Unlike the survey method in the original ABC where idle time is rarely documented, TB-ABC method accepts that resources are not used to their full capacity. Although time is used in many cases, hence the name TD-ABC, other units of analysis can also be used, such as space.
Once the cost time unit of each resource is calculated, the manager then needs to estimate how much time (or another method of measurement) it takes to complete each activity. At this stage, the cost time unit of resources is multiplied by the time taken to complete one activity to calculate the cost driver.
Time-driven Activity-Based Costing Key Takeaways
Time-Driven Activity-Based Costing is important because it provides a more efficient, practical, and scalable approach to cost allocation, especially in complex organizations. By using time estimates rather than detailed data collection, TD-ABC enables better resource management and more accurate decision-making across various business operations.