Time-Driven ABC
ABC allows users to see the cost structure and cost consumption on each and every level of the organization – from overall organizational and departmental level to the customer and product or service level. Such a powerful approach to cost analysis will help management with better pricing and reorganizing its activities to minimize cost and maximize value for the end users.
However many companies going through the process of implementing the activity based costing share similar experiences including large investments in money, time and efforts.
The question that many ABC corporate users asked was whether it is a smart investment going through the entire activity based costing development and implementation experience.
There is an easier way to develop, implement and use ABC which is not that time consuming and of course offers similar benefits at a lower cost – the time driven activity based costing.
How does time driven ABC costing work?
Unlike traditional activity based costing, which is more complex, the time driven ABC simplifies the entire process by focusing on estimating the capacity, cost and units of activities.
This simplified approach requires less data in its time based algorithm and as a result the development time and cost is decreased drastically. In addition the maintenance of a typical ABC system typically requires entire team for support and full time ABC focused individuals in larger organizations. The maintenance cost of time driven ABC is reduced as well.
For organizations with multiple similar locations like logistics, manufacturing and retail companies the benefits are even better. They can develop the time driven ABC in one location and roll out the system throughout the entire organization by using the same ABC structure and processes.
While the capacity and cost might be different in different locations, the type of the activities and the way value is created will be the same which means that the same algorithm can be used by using the same drivers.
Some of the benefits of implementing and using time driven activity based costing include:
- It uses the practical capacity in the system so it can always shows how much capacity is not being used helping management better organize their operations
- Because of its simplicity it can be easily automated by using data from transactional information systems already in use by the organizations
- Easy-to-use and easy-to-update if any changes are required to be made in the logic of the system
- Easy-to-test the results by the users
- Simplicity allows easy scaling and implementation company wide once the initial system and algorithm has been developed
- Savings based on the shorter development time compared to traditional ABC