Activity-based costing versus time-driven activity-based costing

¶ … ABC and TDAC

The concept of activity-based accounting first appeared in the manufacturing sector during the 1970s and was formally defined by Robert S. Kaplan and W. Bruns in 1987 (Kaplan and Bruns, 1987). Traditional activity-based costing (ABC) is considered a "push" model of costing where an accountant starts with total expenses spent on various types of resources, such as salaries or supplies, and then determines what percentage of that resource is associated with each product or service (Ni u). Then the accountant applies that ratio to the total cost to generate a cost allocation for a given product (Ni u). In this way, overhead costs are assigned products and services according to their actual consumption so that organizations have a better picture of their true costs. Calculating baselines for activities, developing the modeling and retesting the model after it is implemented take a lot of time and is costly (Kaplan and Anderson, 2006).

To address concerns with ABC, Robert S. Kaplan and Steven R. Anderson developed time-driven ABC which is a "pull" modeling of costing (Ni u). "Time-driven ABC decreases the amount of data needed, and only requires estimates of two things: (1) the practical capacity of committed resources and their cost, and (2) unit times for performing transactional activities." (Kaplan and Anderson, 2006). The accountant then multiples this information by the quantity of the product (Ni u). Time-driven ABC computes activity costs at standard rates and leaves a "leftover efficiency" and/or unused capacity cost variance.