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Time-Driven Activity-Based Costing

Activity-Based Management is a method of decision-making that uses activity-based costing information to improve profitability, by managing the value and activity costs related to products and services.

In complex environments Time-Driven ABC is the most suited solution. This is an approach to Activity-Based Costing in which the costs of cost objects are calculated based upon the time required to perform the different activities. This is a new approach that no longer assigns resources and costs to specific activities. It identifies the different resource groups (departments) in the company, their costs and their practical capacity (expressed in units of time).

Based upon this information, the cost per time unit is calculated. Using information collected during interviews of workers, the companys activities are identified and data are collected on the time needed to perform each activity.

In Time-Driven ABC, the time needed to perform an activity is modeled via time equations. Time equations are mathematical functions that express the relationship between the time needed for a given activity and the different drivers. The activity cost assigned to the cost object is calculated by multiplying the cost per time unit of the resources by the time needed to perform the activity.

Some of the advantages of this technique are its ability to cope with a high variety of complex processes, its maintainability and stability, and the insights it provides related to unused capacity.

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