5.3 Time-Driven ABC

Time-Driven ABC simplifies cost allocation by focusing on time as the primary cost driver. It uses time equations to estimate resource demands, making it easier to capture complexity in processes and provide more accurate cost information.

TDABC calculates a capacity cost rate by dividing total resource costs by practical capacity. This approach reduces implementation costs, enables easier updates, and provides granular insights into inefficiencies and unused capacity, supporting better decision-making.

Time-Driven ABC Fundamentals

Overview and Key Concepts

Top images from around the web for Overview and Key Concepts

• 

  Costeo Basado en Actividades - ABC View original

  Is this image relevant?

• 

  Kostenoptimalisatie en architectuur? – Organisatieontwerp.nl View original

  Is this image relevant?

• 

  Frontiers | Activity-Based Costing Using Multicriteria Drivers: An Accounting Proposal to Boost ... View original

  Is this image relevant?

• 

  Costeo Basado en Actividades - ABC View original

  Is this image relevant?

• 

  Kostenoptimalisatie en architectuur? – Organisatieontwerp.nl View original

  Is this image relevant?

1 of 3

Top images from around the web for Overview and Key Concepts

• 

  Costeo Basado en Actividades - ABC View original

  Is this image relevant?

• 

  Kostenoptimalisatie en architectuur? – Organisatieontwerp.nl View original

  Is this image relevant?

• 

  Frontiers | Activity-Based Costing Using Multicriteria Drivers: An Accounting Proposal to Boost ... View original

  Is this image relevant?

• 

  Costeo Basado en Actividades - ABC View original

  Is this image relevant?

• 

  Kostenoptimalisatie en architectuur? – Organisatieontwerp.nl View original

  Is this image relevant?

1 of 3

• Time-Driven Activity-Based Costing (TDABC) streamlines traditional ABC by focusing on time as the primary cost driver
• TDABC uses time equations to estimate resource demands for activities and transactions
• Simplifies cost allocation process reduces data collection and maintenance efforts
• Provides more accurate cost information by capturing complexity and variation in processes

Capacity Cost Rate Calculation

• Capacity cost rate determines the cost per unit of time for resources
• Calculated by dividing the total cost of resources by the practical capacity of those resources
• Formula: $\text{Capacity Cost Rate} = \frac{\text{Total Cost of Resources}}{\text{Practical Capacity}}$
• Practical capacity typically estimated at 80-85% of theoretical capacity (accounts for breaks, training, maintenance)
• Enables more accurate resource cost allocation based on actual time consumed

Advantages of TDABC

• Reduces implementation and maintenance costs compared to traditional ABC
• Enables easier updates to reflect changes in processes or resource consumption
• Provides more granular insights into process inefficiencies and unused capacity
• Facilitates better decision-making for process improvements and resource allocation
• Allows for more frequent cost model updates enhances accuracy and relevance of cost information

Time Equations and Estimates

Time Equation Components and Structure

• Time equations represent mathematical formulas for estimating activity durations
• Consist of a base time for standard activities plus additional time for variations
• General structure: $\text{Total Time} = \text{Base Time} + \sum(\text{Time per Variation} \times \text{Quantity of Variation})$
• Capture complexity and diversity of activities within a single equation
• Allow for easy updates when processes or time estimates change

Developing and Refining Unit Time Estimates

• Unit time estimates represent the time required to perform one unit of an activity
• Obtained through direct observation, interviews with employees, or historical data analysis
• Initial estimates can be rough approximations refined over time as more data becomes available
• Utilize time studies, work sampling, or video analysis for more precise measurements
• Periodically review and update estimates to reflect process improvements or changes

Applying Time Equations in Cost Allocation

• Multiply time consumed by each activity (from time equations) by the capacity cost rate
• Results in accurate cost allocation based on actual resource consumption
• Enables cost assignment to individual products, customers, or transactions
• Facilitates identification of profitable and unprofitable activities or customers
• Supports data-driven decision-making for process improvements and resource allocation

Resource Capacity in TDABC

Types of Resource Capacity

• Theoretical capacity represents maximum possible output under ideal conditions
• Practical capacity accounts for unavoidable downtime (breaks, maintenance, setup)
• Typically estimated at 80-85% of theoretical capacity for most resources
• Idle capacity represents the difference between practical capacity and actual utilization
• Understanding different capacity types crucial for accurate cost allocation and efficiency analysis

Measuring and Managing Resource Capacity

• Regularly monitor actual resource utilization against practical capacity
• Identify underutilized resources and potential bottlenecks in processes
• Calculate capacity utilization rate: $\text{Capacity Utilization Rate} = \frac{\text{Actual Utilization}}{\text{Practical Capacity}} \times 100\%$
• Use capacity information to make informed decisions on resource allocation and process improvements
• Consider outsourcing or reallocating excess capacity to more productive activities

Capacity Analysis and Cost Management

• TDABC highlights unused capacity costs enables better cost management
• Analyze reasons for unused capacity (seasonal demand, inefficient processes, overstaffing)
• Develop strategies to reduce or reallocate unused capacity (cross-training, flexible scheduling)
• Use capacity information to support make-or-buy decisions and capacity expansion planning
• Regularly review capacity assumptions and adjust as business conditions change