In recent years a “new” development in ABC is Time Driven ABC. At this page we will show the merits and show how CostPerform already implements Time Driven costing since the mid nineties. Activity Based Costing, as it was developed in the eighties, has a lot of advantages. But in the last 20 years also some downsides became apparent. It was hard to maintain, complex and did not show the (under-)utilization of capacity.
Complexity and Capacity
Most ABC projects were done by assigning cost from resources to activities using percentage estimations based on interviews or time-reporting systems (as proposed in literature). This meant a lot of complexity due to the large number of activities reported. The next year all interviews and estimations had to be re-done to capture changes. The insight and comparisons were missing because calculations were based on estimated percentages which did not uncover changes in the real world. Also the use of capacity was not taken into account.
15 years later the above situation leads to an additional view on ABC: Time-Driven ABC. Robert S. Kaplan and others “invented” a new approach, with time based cost rates and usage of resources by cost objects. It is a very logical step to include the usage of time to the cost object. Or as Robert S. Kaplan put it “How can it be that it is so simple and yet we didn’t think of it 15 years ago?” (during a presentation in Amsterdam on 5 March 2007). In the meantime, in Europe Best Practices were (time driven) pull models. Already in the mid-nineties at least three vendors offered pull or time-driven ABC tools (QPR CostControl, Cost-It by KPMG and Tele-Com-Pass by PwC). Widespread practice in Europe was pulling from the client to the resource. The number of products sold is driven by the sales to clients, the usage of activities is driven by the bill of activities and the resource usage is driven by the bill of resources (time).
Cost Perform South Africa consultants, also concludes that Time Driven ABC has many similarities with European Best Practice costing systems and that “Time Driven” gives a label to many existing Best Practices. The solution with “time equations” on the other hand is not seen here. The reason being that it only moves complexity rather than eliminating it, time equations don’t reduce model maintenance and has an inherent risk of reducing cost transparency.
Time Driven ABC in CostPerform
CostPerform easily handles Time Driven models. We can do so in 2 ways:
- using time equations
- making time driven cost visible
CostPerform is capable of using time equations to allocate cost. A time equation is a kind of formula that uses triggers on cost objects, e.g. from transactional data. An example of a time equation for an order processing department is: 4 minutes plus 8 minutes if foreign language plus 2 minutes per order line plus 3 minutes per updated database field plus 10 minutes for rush orders plus 15 minutes in case a confirmation letter is needed.
Although the time equations give the right cost calculation, it is a bit of black box. You would need to dig into the formula of the time equation to understand why cost is caused by a certain customer, order or order line.
The second option that CostPerform offers is one where the same data is used but the impact of the various items in the time equation is made visible. We take all items in the time equation and import them as sub-processes. These sub processes are allocated based on the same data in the transactional files. The difference is that it becomes visible why a certain order is causing a high cost.
We prefer the second method because it takes the reason for the cost out of the black box and makes the cost relation visible and actionable.