...Five myths about time-driven activity-based costing The straight facts about traditional and time-driven costing methodologies After decades of proven success, activity-based costing (ABC) has come under fire from its earliest and most active proponents. Robert S. Kaplan and others are promoting a “new, innovative, time-driven methodology” that presumably “delivers great improvements to the older systems of 15 years ago.”1 Companies are replacing their current costing solutions to try to get strategic information faster and with less maintenance. Is this approach really new and revolutionary? Does it deliver on its promise? Time-driven ABC vs. traditional ABC Traditional ABC is a “push” model of costing. You start with total expenses spent on various types of resources, such as salaries or supplies, and then determine what percentage of each resource is associated with each product or service. Then you apply that ratio to the total cost, which generates cost allocations for every product. In contrast, time-driven ABC is a “pull” model of costing. You start with estimates of two parameters: units of time required to perform an activity and the cost per unit of time. You then multiply this information by the quantity of the product. For resources not measured by units of time, the costing methodology can accept other measures. For instance, the capacity of a distribution center could be measured by available area and priced at cost per cubic meter. The capacity of...
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...M A N AG E M E NT ACCO U NTI N G E N CO NTRO L Time Driven ABC: nieuw in Nederland? Onlangs verscheen Time Driven Activity Based Costing van Robert S. Kaplan en Steven Anderson. Beide auteurs bieden een alternatief voor traditioneel Activity Based Costing, een praktijkmodel voor het bepalen van kostprijzen dat in de jaren tachtig werd ontwikkeld. Is Time Driven ABC de oplossing voor de beperkingen van Kaplans eerdere model? Auteur ir. Bas Mutze CMA en drs. Dave van Ierland zijn respectievelijk werkzaam als Executive Business Consultant en Business Consultant bij Atos Consulting, binnen de line of business Financial Services en solution World Class Finance. n de tweede helft van de jaren tachtig verscheen het vierluik The Rise of Activity-Based Costing1 van Robin Cooper, die hierin de opkomst van Activity Based Costing (ABC) in het Amerikaanse bedrijfsleven beschreef. In de Nederlandse vakbladen en literatuur is in het begin van de jaren negentig eveneens veel gepubliceerd over ABC. ABC is het causale verband leggen tussen kosten en kostendragers (producten/diensten) via activiteiten. Een onderneming zal activiteiten verrichten om producten en diensten te creëren. Om deze activiteiten uit te voeren, heeft een onderneming mensen en middelen (resources) nodig. De kosten van mensen en middelen worden naar activiteiten verdeeld via resource drivers en de kosten van activiteiten gaan via activity drivers naar producten/diensten (zie figuur 1). Een voorbeeld van resource kosten...
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...Time-Driven ABC Companies have shied away from activity based costing, because it was not an accurate assessment of operations, time consuming and too expensive to build and maintain. As a result managers have veered away from using traditional ABC in their organizations, and needed to find a solution to the problem. The new approach relies on informed managerial estimates rather than on employee surveys. It also provides managers with a far more flexible cost model to capture all the complex details of their operations. The way people traditionally constructed the ABC model was the root of the problem with it. To build a traditional ABC model a department would survey employees to estimate the percentage of time they spend on activities and then assign the department's resource expenses according to the average percentages you get from the survey. Armed with figures, known as the cost-driver rates, managers could assign the costs of the department's resources to the customers and products that use its services. This worked well in the limited setting in which it was initially applied, typically a single department, plant, or location. The problem arises when you try to roll out this approach on a large scale for use on a continuous basis. The systems that are put in place are updated infrequently; the model's estimates of process, product, and customer costs soon become inaccurate. What's more, people waste their time arguing about the accuracy of cost-driver rates that...
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...K IT Time-Driven Activity- Based Costing by Robert S. Kaplan and Steven R. Anderson • Many companie s abandoned activity-based costing because it did not capt ure the compl exity of their operations, took too long to implem ent, and was too expensive to build and maintai n. Here’s a way ar ou nd th ose problems. R eprint R0411J T OOL K IT Time-Driven Activity- Based Costing by Robert S. Kaplan and Steven R. Anderson harvard business review • november 2004 pa ge 1 C OPYRIGHT © 2004 HAR V A R D BUSINESS SCHO OL PUBLISHING C ORP OR A TION. ALL RIGHTS RESER VED. Many comp anies abandoned acti vit y-based costing because it did not capture th e complexity of their operations, took too long to implement, and wa s too expensive to build and maintain. Here’s a way around th ose problems. In the classroom, activity-based costing looks like a great way to manage a company’s lim- ited resources. But many managers who have tried to implement ABC in their organizations on any significant scale have abandoned the at tempt in the face of rising costs and em- ployee irritation. They should try again, be- c ause the new approach we lay out in the fol- lowing pages sidesteps the difficulties traditionally associated with large-scale ABC implementation by relying on informed man- agerial estimates rather than on employee sur- ve ys. It also provides managers with a far more flexible cost model to capture...
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...BYP4-5 Answers: a) Activity-based costing, ABC, would seem to be an accurate way for managers to assign costs to the customers and products that use a department's services. But real-world use has shown ABC loses power in large-scale operations, and can be difficult to implement and maintain. In their HBR article, excerpted here, authors Kaplan and Anderson suggest the process be simplified through an approach they call "time-driven ABC." Here's an overview. The solution to the problems with ABC is not to abandon the concept. ABC after all has helped many companies identify important cost- and profit-enhancement opportunities through the repricing of unprofitable customer relationships, process improvements on the shop floor, lower-cost product designs, and rationalized product variety. Its potential on a larger scale represents a huge opportunity for companies. Fortunately, simplification is now possible through an approach that we call time-driven ABC, which we have successfully helped more than 100 client companies implement, including those described in this article. In the revised approach, managers directly estimate the resource demands imposed by each transaction, product, or customer rather than assign resource costs first to activities and then to products or customers. For each group of resources, estimates of only two parameters are required: the cost per time unit of supplying resource capacity and the unit times of consumption of resource capacity by products...
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...Time Driven ABC costing is more superior to the traditional method in many different ways. Overall there are many negatives to the traditional system including its higher cost, low accuracy and is an extremely complicated system. The time driven ABC costing has many benefits including its lower cost, ease of implementation, higher accuracy and the larger scope of its models. Traditional ABC costing has been used for a very long time but with the introduction of modern computers it allows for Time driven to be a much more effective cost system. The traditional cost system is quite expensive and time consuming because it requires a lot of people to maintain and gather the necessary information to try to create an accurate cost system. Due to the time consuming nature of the system it is infrequently updated and leads to inaccurate cost estimates. Also when information was gathered from employees many employees did not consider the time spent in a nonproductive fashion. So many cost drivers were created under the notion that employees were working at full capacity. Overall the traditional cost system does not even come close to matching the accuracy of Time Driven ABC costing. Time Driven ABC costing is superior to traditional costing mostly because of its increased accuracy. It is much easier to implement because the only factors that it requires is the cost rate of supplying resource capacity and the consumption of the resource capacity by the products or services. Time Driven...
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...Teaching Plan This is an introductory case, and yet it introduces a powerful new approach for building an ABC model. Considerable theory is illustrated in how we build the Sippican time-driven ABC (TDABC) model. Also, the (B) case introduces an important link, previously recognized but not exploited, in how to embed an ABC model into the budgeting process, replacing line-item budgeting with an integrated, analytic approach. The case discussion provides insight and confidence about the feasibility of building a TDABC model, especially in the face of resistance from finance people who claim that ABC is too complex to implement. 1. Given some of the apparent problems with Sippican’s cost system, should executives abandon overhead assignment to products entirely and adopt a contribution margin approach in which manufacturing overhead is treated as a period expense? Why or why not? 2. Calculate the practical capacity and the capacity cost rates for each of Sippican’s resources: production and setup employees, machines, receiving and production control employees, shipping and packaging employees, and engineers. 3. Use these capacity cost rates and the production data in Exhibits 3 and 4 to calculate revised costs and profits for Sippican’s three product lines. What difference does your cost assignment have on reported product costs and profitability? What causes the shifts in cost and profitability? 4. Based on the revised cost and profitability...
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...H & R Block is one of the largest and oldest service providers. The company was founded by brothers Henry and Richard Bloch in 1955. The company began franchising in 1956 and they went public in 1962. The company employed over 100,000 tax professionals that are trained both within the U.S. and worldwide. The company has prepared more than 550 million tax returns since the business started in 1955. One key important key to the company success is that they have a retail office within 5 miles of most Americans. You are able to do your taxes both in person and on-line because H & R Block offers these services. The tax-payer can chose to walk into an office and work face-to-face with the tax specialist, they can work totally on their own using the online or packaged do-it-yourself tax prep tools, or they can utilize the do-it-yourself software with unlimited help from and online tax professional. H & R Block will offer you a wide variety of tax consulting services. Straight forward tax return offers the most basic start which is simple. You are able to accomplished this either on-line or in house. H & R Block also offer “drop off” service. A small business service is offered by H & R which includes helping the preparer to navigate the tax requirement of running a business. This is done throughout the year and not just a year-end service. H & R offers a service called “Best of Both”. This is where you get the convenience of doing it online with tax support preparation from...
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...ability of the products it offers to compete in a market. If a firm can determine its costs and the demand at each possible price offering it is likely to find the market price that maximizes profit. (Bakken, 2012). Hence, it is important that companies employ strategies that will ensure that cost allocation is accurate and gives management an accurate view of production cost. Having a full picture of every production step and their respective cost can help management make better pricing and sells decisions. This paper is aimed at exploring the process of cost allocation, specifically, the Activity Based Costing System (ABC). It examines how the ABC system diverges from the previous traditional accounting system. It highlights the advantages and disadvantages of the ABC model, and presents an alternate approach that tries to fix the loop holes that exist in the ABC system. This paper shows that the analysis of costs and resources used in the production of goods and services is the most important tool needed in determining business performance (Veres, 2011). Cost Allocation: Purpose and Process When a firm produces more than one product or provides more than one type of service, a resource may be shared. This shared resource places a financial burden on the firm. Cost allocation is the process of assigning the financial burden to the associated production process. It is an internal accounting tool that assigns cost for resources that support production. According to Jaimbalvo...
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...Activity-Based Costing (ABC) in Service Industries H & R Block H & R Block A Study of TDABC Costing Robert Kaplan defines activity based costing (ABC) as a system that “provides the conceptual framework for linking financial, production, scheduling, order-entry, marketing, and sales data… into a comprehensive costing and profitability model that reports profitability by individual product, customer, and even by order. (Kaplan, 2009). Time-driven ABC has taken this methodology a step further and simplified the process to make an even more powerful tool to measure the financial effectiveness of a company. This paper is attempts to take a U.S. service company and map out an implementation of TDABC to prove the ease and effectiveness of this accounting tool. Company Description H&R Block is one of the oldest and largest tax service providers. It was founded in 1955 by brothers Henry and Richard Bloch. The company began franchising in 1956 and went public in 1962. It employs over 100,000 trained tax professional both within the U.S. and worldwide. According to their web-site, H&R Block prepares one in every 7 U.S. tax returns.(HRBlock.com, 2013) One key to their success is that they claim to have a retail office within 5 miles of most Americans. H & R Block offers their services both in person and on-line. The tax-payer can chose to walk into an office and work face-to-face with the tax specialist, they can work totally on their own using the online or packaged...
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...Managerial Accounting [pic] Case Analysis: Elkay Plumbing Vaughn, Reginald 1. Please comment briefly on the benefits of Time Driven Activity Based Costing (TDABC) Time Driven Activity Based Costing (TDABC) is a popular alternative to Activity Based Costing. First, Activity-based costing (ABC) should be defined. ABC is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. CIMA, the Chartered Institute of Management Accountants defines ABC as an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilizes cost drivers to attach activity costs to outputs. While ABC is considered a valuable tool for management, developing the model, calculating the bottom-lines, and testing the model once it is implemented is costly and arduous. Managers are choosing TDABC because of the following benefits: • it can be easily updated to reflect changes in processes and resources costs • it captures the complexities of operations, it can be easily validated • it can be estimated and installed quickly • it identifies opportunities for process efficiencies • it is inexpensive to use ...
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...(12F360) SCM Introduction Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing. CIMA (Chartered Institute of Management Accountants) defines ABC as an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilize cost drivers to attach activity costs to outputs. Aims of model With ABC, a company can soundly estimate the cost elements of entire products ACTIVITIES and services. That may help inform a company's decision to either: * Identify and eliminate those products and services that are unprofitable and lower the prices of those that are overpriced (product and service portfolio aim) * Or identify and eliminate production or service processes that are ineffective and allocate processing concepts that lead to the very same product at a better yield (process re-engineering aim). In a business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers. ABC is generally used as a tool for understanding product and...
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...Activity-Based Budgeting Forecasting Resource Demands Excerpted from Time-Driven Activity-Based Costing: A Simpler and More Powerful Path to Higher Profits By Robert S. Kaplan, Steven R. Anderson Harvard Business Press Boston, Massachusetts ISBN-13: 978-1-4221-2227-3 2227BC Copyright 2008 Harvard Business School Publishing Corporation All rights reserved Printed in the United States of America This chapter was originally published as chapter 5 of Time-Driven Activity-Based Costing: A Simpler and More Powerful Path to Higher Profits, copyright 2007 Harvard Business School Publishing Corporation. No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher. Requests for permission should be directed to permissions@harvardbusiness.org, or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163. You can purchase Harvard Business Press books at booksellers worldwide.You can order Harvard Business Press books and book chapters online at www.harvardbusiness.org/press, or by calling 888-500-1016 or, outside the U.S. and Canada, 617-783-7410. chapter five WHAT-IF ANALYSIS AND ACTIVITY-BASED BUDGETING Forecasting Resource Demands the full benefits from Time-Driven ABC only if they adjust the supply of their resources to the demands...
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...Activity-Based Budgeting Forecasting Resource Demands Excerpted from Time-Driven Activity-Based Costing: A Simpler and More Powerful Path to Higher Profits By Robert S. Kaplan, Steven R. Anderson Harvard Business Press Boston, Massachusetts ISBN-13: 978-1-4221-2227-3 2227BC Copyright 2008 Harvard Business School Publishing Corporation All rights reserved Printed in the United States of America This chapter was originally published as chapter 5 of Time-Driven Activity-Based Costing: A Simpler and More Powerful Path to Higher Profits, copyright 2007 Harvard Business School Publishing Corporation. No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher. Requests for permission should be directed to permissions@harvardbusiness.org, or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163. You can purchase Harvard Business Press books at booksellers worldwide.You can order Harvard Business Press books and book chapters online at www.harvardbusiness.org/press, or by calling 888-500-1016 or, outside the U.S. and Canada, 617-783-7410. chapter five WHAT-IF ANALYSIS AND ACTIVITY-BASED BUDGETING Forecasting Resource Demands the full benefits from Time-Driven ABC only if they adjust the supply of their resources to the demands...
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.... Managerial Accounting (ACC560) 04/25/2015 Introduction Activity-Based Costing (ABC), a costing system which is more reliable than traditional cost accounting, has been implemented in manufacturing companies for more than a decade. In many cases, the ABC implementation has contributed substantially to a more efficient use of overhead resources, and therefore, has led to an impressive cost savings. Many service companies, in their experience of high overhead and high capital cost, have costs which are left untraced or are allocated arbitrarily. The resulting distortions may provide misleading information to the management and may lead to poor decision-making. A successful business usually starts with a vision statement that gives detail to potential opportunities of the organization. Managers must have the knowledge to understand the concept of choosing a strategy that can be beneficial to the business operation. Using the information provided by ABC, companies will be able to cut costs, review pricing policies and determine more profitable mix. This paper will evaluate how AOL- time warner can implement an ABC system, how the system can help maintain a competitive advantage, the impact the system has on online business sale. Company history Time Warner, as we know it today, is the result of many mergers and acquisitions. The company’s history can be traced back to 1922, when Warner Brothers was established. The company was later renamed to Warner Communications...
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