The Benefits of Time-Driven Activity-Based Costing

The report explains the use of Time Driven Activity-Based Costing in the Company that deals with service delivery to its customers. (TDABC) is the cost accounting device used by the management in financial planning for the measurements required to handle the production and sales evaluation in their calculated plans. The paper specifically analyses the application of the TDABC in the company.  The first section of the report provides a brief description of the chosen company (Sanic Limited Company). The second section deals with the features and description of TDABC. The third part of the paper explained in detail differences between Activity-Based Costing from TDABC and traditional costing method.  The fourth section will provide information on whether the model (TDABC) is most appropriate for the company. Then the last part is the general conclusion.

Sanic Hotel was founded in the early 1990 by the Community youth group. The Hotel mainly provides accommodation services to a large number of the customers, especially the tourists. This business trend has resulted into a series of competition among various companies that offer accommodation services.  The Management uses the information derived from the simple tradition costing method to calculate both the indirect and indirect cost. Sanic Hotel experiences the problem of strong competition due to hotel developments which causes a positive movement every year especially in the city. Due to growing competition, Sanic hotel began to offer various services to its customers. The hotel also consider the calculation of correct cost( Direct and Indirect cost) in order to prevent the occurrence of underpricing or overpricing which may affect the hotel profitability. Sanic hotel decided to apply modern cost allocation methods such as, TDABC and Activity Based Costing (ABC) which are more accurate and effective than traditional model. This is because the company experiences difficulty in the calculation the determination of its budget. This made the company to seek for the available solutions to the problem.

TDABC originated in manufacturing firms in the USA; however it has shown to be very important in corporate bodies involved in the delivery of services. TDABC is the new model for costing that explains all the limitations and difficulties of the tradition ABC. It is less costly, simpler and quicker to implement into the organization .This model recognizes the aptitude of each process or department and then assigns the cost of the total resource. It also takes into consideration the time needed to accomplish a particular activity. In case the demand for a particular task in the process or department declines, the model can be used to approximate the amount of resources that are released (Lorentzon & Fredlund, 2017). TDABC take into consideration different features of activity by the equation of time. The time equations allocate the cost and time of activity to that of the cost item. TDABC approach is made up of 6 steps:

Understanding TDABC and Its Application in Sanic Hotel

Identifying resource groups and the activities for which they are used:

• Defining the cost of each group
• Estimating the practical capacity of each group
• Calculating cost per unit
• Determining the required time units for each activity
• Calculating cost per transaction

The core important features of TDABC are the equations of time. The formula eases the calculation process. Time- Driven ABC makes use of time as the core primary driver for cost.

Another important feature is that processes are quite easy to separate and the actual resources can be divided across subtask. Time- driven activity –based costing model mainly focuses on the company resources.

TDABC is the modern method for costing that solves all the limitations and problems of both the ABC and traditional model. It is less expensive, easy to understand and quicker to implement, and enables cost driver rate to depend on practical amount of the resources delivered. In tradition ABC, the rates of cost driver are determined by dividing cost of total activities by quantity or volume of the transaction (amount of the customer orders and amount of setups). The outcome of the calculated result is per transaction. It assumes the idea that every occurrence of transaction uses equal amount of resources. This assumption is where TDABC differs. It explained it that time drivers have high degree of accuracy than transaction drivers which are expensive (Barros & Ferreira, 2017).

TDABC does well compare to ABC when resources are more traceable to activity, whereas ABC performs highly as compare to TDABC if the activities are more visible to product. TDABC removes the subjective, survey and interview to describe resource pool. Whereas both process are not in tradition model. TDABC reduces the difficulty of cost allocation and measurement that are associated with the use of traditional model and ABC approach. Another difference is that ABC includes all resource in its activity information with the use of resource columns, whereas TDABC include the information by the actual activity rows.

In managing Sanic Hotel, the managers and board requires accurate info regarding operational cost structures alongside profitability to assist in the process of making a decision. The mangers and board always use a cost computation system to offer accurate info to showcase how the organization has allocated resources to supply its services or products. The application of TDABC has been increasingly used in the recent past over ABC and traditional in other Hotels because it offers such required accurate info needed by the board and management. However, Sanic Hotel has not embraced the TDABC and is still using traditional methods and ABC despite the potential of TDABC.

Differences Between Activity-Based Costing, TDABC, and Traditional Costing Method

The TDABC will, therefore, be more fruitful and successful in Sanic Hotel if it is embraced in the recalculation of both direct- and indirect costs. When this is done and the outcome compared to those results obtained through ABC or traditional methods, the outcome will indicate that TDABC approach remains increasingly applicable and appropriate for Sanic Hotel services costing than the currently sued ABC or traditional methods. Moreover, TDABC has led to a more accurate and flexible use of capacity cost rate for the Hotel Industry when the cost is being compiled and hence, Sanic Hotel stands to benefit a great deal by embracing TDABC.

Moreover, TDABC has been appropriate in helping the hotels that have implemented it to keep pace with the trends in the recent past whereby human mobility has surged swiftly, particularly via individuals who visit big cities for both business trips and holidays. This is because this mobility has seen the Sanic Hotel’s need for accommodation to surge dramatically thereby requiring a more effective approach to costing than ABC or traditional methods. Thus, TDABC is always used to solve this problem by availing the platform to survive the stiff competition by helping Hotel Industry to run its operational activities effectively and efficiently. This is because TDABC has helped many hotels to consider each costs exhaustively including indirect- and direct costs, and subsequently recouping them through the provided services. This will ensure that Sanic Hotel does not undertake incorrect costing that can lead to underpricing/overpricing that may affect its profitability and competitiveness. As been observed, Sanic Hotel currently uses a simple traditional costing approach which has many flaws. There is a need for Sanic Hotel to embrace a TDABC which is already proven to be more effective as well as accurate compared to traditional approaches. Moreover, TDABC is even more effective than ABC because it has been developed following the hurdles in the operation and implementation of ABC approach.

Time Driven ABC approach is suitable for the operation of the organization. This is because of the added advantage that it has compared to other approaches. The TDABC helps the firms to solve the following problems:

• It eliminates the problems that are involved in maintenance and implementation of the other model approach (ABC model), for example it now not necessary to perform regular surveys to find the sharing of work personnel within the department.
• TDABC make use of both non-standard activities during the calculation of cost by taking into consideration time equation.
• It also take into consideration all the committed resource plus their cost, that are not attributed to activities, products and customers but have a great influence on the item that affect the final financial result of the year.
• The use of the TDABC in the firm also enables it to find out opportunities that can increase the department capacity management and efficiencies.
• The model is very easy to put in place in the organization. Therefore the management and board of governance will require fewer amounts of resource and time when developing the model.
• It enables actual estimate of the resource demand, this enables firms to budget for the total capacity required to be used for the purpose of production and sales estimate in the firm’s strategic plans.
• The model can also help the firm to reduce the errors of measurements which are mostly appears when the traditional and ABC are use in the calculation by the management.
• It include the calculation of idle capacity this enable the firm to compare the actual value of the capacity that are available and this help to find out the cost of the activity that are not being used by various department.

Therefore, based on the above advantages attached to TDABC over both ABC and traditional approaches, as a graduate consultant in management consultancy firm, I recommend Sanic Hotel (one of my firm’s clients) to shift from its current ineffective budgeting system to TDABC because it is suitable to the Hotel.  

Conclusions

The main goal of this report is to provide detail understanding of the TDABC and how the organization can implement it in order to help increase the performance of various departments within the organization. It also explains the differences between TDABC and the traditional model. The analysis of the comparison state that both the systems share quantitatively and qualitatively approaches with an aim of generating cost of products.

Due to the many advantages that the firm realizes when it made use of the TDABC model in the calculation of the budget and various. It is therefore advisable for the management to take into consideration the use of the model in order to solve the limitation of the traditional model. Because of the many advantages of TDABC, it is advisable for the companies to combine both the models as this will increase the performance of the organization. 

References

Barros, R. S., & Ferreira, A. M. D. S. D. C. (2017). Time-driven activity-based costing: Designing a model in a Portuguese production environment. Qualitative Research in Accounting & Management, 14(1), 2-20.

Lorentzon, J., & Fredlund, J. (2017). Application of Performance Measurement on Manufacturing Simulations for Knowledge-Based Decision Support.