Time Driven Activity Based Accounting

Document Type:Thesis

Subject Area:Business

Document 1

The following comprehensive report explains TDABC and how effective it can if XYZ implements it. The report is divided into four sections. The first section describes XYZ Ltd while the second section analyses TDABC by explaining its features. The third section explains the differences between TDABC, ABC, and traditional costing. The last section discusses how suitable TDABC is for XYZ. A new form of ABC system known as time-driven ABC has been established to enhance the ABC concept (Öker and Adıgüzel 2016, p. TDABC helps the management in estimating that is required to perform every transaction in the company. Unlike the old ABC, the revised approach of ABC system starts by assigning production overheads to the transactions and then to the customers or products.

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For every group of resources, the required parameters are unit per time and the cost per unit per time for the resources that the company uses in facilitating its production. TDABC provides the company with more accurate cost drivers rates since it allows an estimate of unit times even for complex and specialized transactions (Kaplan et al. TDABC vs. ABC and Traditional Costing Traditional costing assigns production overheads to the units produced. The traditional costing assumes that the underlying driver of the production overheads is the volume metric. Under the traditional costing method, the accountants assign the manufacturing overheads to the product only and ignore the nonmanufacturing costs that are associated with manufacturing such as selling and administrative costs (DRURY 2013, p.

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Traditional costing is easy to implement and suitable for companies that produce only one product. The practical capacity is based on the theoretical capacity that illustrates the possible output that the company would have produced if all the available resources were optimized (Frazier 2014, p. Since it is not possible to achieve the theoretical capacity in reality that is why companies apply the practice capacity. If the management is having difficulties in determining the practice capacity, then the management should estimate it at 80% to 85% of the theoretical capacity. With the practical capacity, the management can determine the unit cost by dividing the cost of resources by the practical capacity. The third step involves determining the time it has taken in performing specific activities.

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With 30 employees, who work 7. 6 hours every day. That means the company has a supply of approximately 10,032 minutes every month from each employee. The practical capacity an 80% will be 8,025 minutes per worker or 240,750 total monthly minutes. The average monthly production overhead is $200,000. From the above analysis, it is evident that time driven activity-based costing system reveals the cost of the activities and the time spent on such activities. With the TDABC, there is a difference between the capacity supplied and the capacity used. The management can analyze the cost of the unutilized resources and decide on the best cause of action in which they can cut the cost associated with supplying the excess resources during the subsequent accounting periods. Besides, they are in a position to monitor the actions over time (Kaplan 2014, p.

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In case XYZ wishes to expand its operations, it can use the information to avoid investing in projects that are not variable. For instance, when the company designs a compensation incentive where the employees get an increase of 5%, then the cost per time unit will increase from $0. 83 to $0. 87 per minute. Besides, if XYZ replaces a plant with a new one or adds a new plant in its production, then the resource cost rate should be updated in order to reflect the replacement cost. Secondly, a shift in the efficiency with which the company carries out its activity affects the cost driver rate. It provides the management with necessary information about the costs and profitability in an effective way. With increased profitability and efficiency, the company can position itself in the market by adopting a competitive business strategy such as differentiation or cost leadership.

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