Time-Driven Activity-Based Costing

Definition

Time-Driven Activity-Based Costing (TDABC) is a costing methodology that estimates the cost of resources used by each activity or process within an organization. It uses time as the primary driver to allocate overhead costs, rather than the traditional volume-based cost drivers used in standard activity-based costing.

5 Must Know Facts For Your Next Test

1. TDABC simplifies the implementation of ABC by using time as the single cost driver, eliminating the need to estimate the cost and usage of multiple activity cost drivers.
2. TDABC calculates the cost per time unit of each resource supplied, and then multiplies this rate by the time required to perform an activity or process.
3. TDABC allows organizations to identify and address unused capacity, which can lead to significant cost savings.
4. TDABC is particularly useful in service-oriented or non-manufacturing environments where overhead costs are a significant portion of total costs.
5. TDABC provides more accurate cost information than traditional volume-based costing methods, leading to better decision-making and pricing strategies.

Review Questions

• Explain how a job order cost system applies to a nonmanufacturing environment using the TDABC approach.
  • In a nonmanufacturing environment, such as a professional services firm, a job order cost system using TDABC can be applied to accurately track and allocate overhead costs to specific client projects or engagements. TDABC focuses on the time required to perform various activities, rather than relying on traditional volume-based cost drivers. By estimating the cost per time unit of each resource and multiplying it by the time spent on a job, the firm can more precisely assign overhead costs to individual projects, leading to better pricing decisions and profitability analysis.
• Describe how TDABC can help an organization identify and address unused capacity.
  • One of the key benefits of TDABC is its ability to identify and quantify unused capacity within an organization. By calculating the cost per time unit of each resource and comparing it to the actual time spent on activities, TDABC can reveal areas where resources are not being fully utilized. This information can then be used to make informed decisions about resource allocation, staffing levels, or process improvements to optimize the use of available capacity. Addressing unused capacity can lead to significant cost savings and improved profitability for the organization.
• Analyze how the TDABC approach can provide more accurate cost information compared to traditional costing methods in a nonmanufacturing environment, and explain how this can lead to better decision-making and pricing strategies.
  • In a nonmanufacturing environment, such as a professional services firm, overhead costs often make up a significant portion of the total costs. Traditional volume-based costing methods may not accurately capture the true cost of providing services, as they rely on broad allocation bases that do not reflect the actual resource consumption. TDABC, on the other hand, provides a more granular and precise understanding of costs by focusing on the time required to perform various activities. By accurately allocating overhead costs to specific services or projects, TDABC enables the organization to make better-informed decisions about pricing, resource allocation, and profitability analysis. This improved cost information can lead to more competitive and profitable pricing strategies, as well as more effective resource management and process optimization, ultimately enhancing the organization's overall financial performance.

Related terms

Activity-Based Costing (ABC): A costing methodology that identifies activities in an organization and assigns the cost of each activity resource to all products and services according to the actual consumption by each.

Resource Capacity: The maximum amount of work that a resource, such as a person or a machine, can perform in a given time period.

Cost Drivers:

Factors that cause a change in the cost of an activity, such as the number of setups, machine hours, or labor hours.