Time-Driven activity-based costing.

• Author: Lambino, Christine

Time-Driven Activity-Based Costing Robert S. Kaplan and Steven R. Anderson Publisher: Harvard Business School Press www.HBSPress.org 257 pages, 2007; $45

In the 1980s Kaplan developed activity-based costing (ABC) as a way to measure and link an organization's costs to the goods and services it produces. However, as time progressed, Kaplan and Anderson found problems with ABC. These problems included high costs of collecting interviews for the ABC model, the subjectivity of time allocations, and the difficulty in maintaining the model with respect to process and resource spending changes (such as adding new activities, increases in the diversity of individual orders, channels, and customers).

In Time-Driven Activity-Based Costing, authors Robert S. Kaplan of Harvard College and Steven R. Anderson of Acorn Consulting provide a review of the time-driven activity-based costing (TDABC) model and how organizations can use it to understand the cost and profitability of delivering their products and services. The TDABC model addresses key problems within the ABC model including reducing both the costs of interviews and the subjectivity of time allocations. Some key features of TDABC are:

* The model can be estimated and installed quickly

* It can be easily updated to reflect changes in processes, order variety, and resource costs

* TDABC data can be fed from transactional ERP and CRM systems

* TDABC can be validated by direct observation of the model's estimates of unit times

* TDABC can be easily scaled to handle millions of transactions while still delivering fast processing times and real-time reporting

* TDABC explicitly incorporates resource capacity and highlights unused resource capacity for management action

* TDABC exploits time equations that incorporate variation in orders and customer behavior without expanding model complexity

Kaplan and Anderson begin their book with an examination of the failures of ABC. Based on these failures, the authors developed the formal model of TDABC. The content of this book can be divided up into two parts: the first half introduces the reader to the fundamentals of TDABC. These include topics such as the TDABC estimation of resource demands, calculation of capacity cost rates, project and implementation steps used to build TDABC, activity-based budgeting with the TDABC model, TDABC's application to mergers and acquisitions, and TDABC's integration with several contemporary improvement initiatives.

Kaplan...