Time-Driven Activity-Based Costing

Abstract

The traditional ABC model has been difficult for many organizations to implement because of the high costs incurred to interview and survey people for the initial ABC model, the use of subjective and costly-to-validate time allocations, and the difficulty of maintaining and updating the model as (i) processes and resource spending change, (ii) new activities are added, and (iii) increases occur in the diversity and complexity of individual orders, channels and customers.

Time-driven ABC requires estimates of only two parameters: (1) the unit cost of supplying capacity and (2) the time required to perform a transaction or an activity. A time-driven ABC model:

- can be estimated and installed quickly - is easily updated to reflect changes in processes, order variety, and resource costs - can be data fed from transactional ERP and CRM systems - can be validated by direct observation of the model's estimates of unit times - can scale easily to handle millions of transactions while still delivering fast processing times and real-time reporting - explicitly incorporates resource capacity and highlights unused resource capacity for management action - exploits time equations that incorporate variation in orders and customer behavior without expanding model complexity

The paper uses simple numerical examples to articulate the fundamentals of time-driven ABC and provides several examples of companies that have implemented the approach and enjoyed rapid and significant profit improvements.

Keywords: Activity based costing, customer profitability, management accounting, cost management

JEL Classification: M40, M46