Time-Driven Activity-Based Costing
The emergence of Time-Driven ABC
The emergence of Time-Driven ABCIn the nineties many companies experienced substantial benefits from implementing Activity-Based Costing. They identified new profit opportunities and found more effective ways to manage costs. Using their ABC system they found a better way to manage product portfolios, customer profitability, supply-chain processes and even derive a cost-effective budget that met forecast workload and agreed strategic goals.
However, in complex and dynamic environments companies found it tedious to maintain their activity-based cost systems. In-depth analysis of the pitfalls revealed three main difficulties:
Maintainability
Complexity
Capacity
Implementing Time-Driven Activity-Based Costing
In order to overcome each of these difficulties Robert S. Kaplan and Steven R. Anderson very recently developed a new approach to ABC that both simplifies the estimation of an ABC system, enables it to be updated very easily whenever changes occur in the structure of the model, and also explicitly incorporates accurate estimates of capacities and allows to calculate situation dependent driver rates. In the new approach for each activity time based cost rates are calculated and the costing of the cost objects is based on the time required to perform a transactional activity, hereby possibly using time equations. This approach is called Time-Driven ABC.
The power of Time-Driven Activity-Based Costing
A well-designed Time-Driven ABC System grants management with more accurate insight in costs and a better understanding of the way profits are generated at product, customer and service level.
Since Time-Driven ABC calculates the costs of the different cost-objects on a transactional level, taking into account all differentiating cost parameters, Time-Driven ABC is capable of costing each individual product, order, customer, supplier, etc, not with averages, but taking into account the characteristics of each individual product, order, customer, etc. Due to the integration of financial and operational data, it becomes very easy to identify the reasons why specific cost-objects do not contribute to the profitability of the organisation. After the identification of the reasons for low profitability actions can be taken to increase the profitability.