Application of Time driven Activity Based - Myassignmenthelp.Com

Question: Discuss about the Application of Time Driven Activity Based. Answer: Introduction and Description of Client The world is changing and change itself is changing. With the passage of time, the Universe of Business and Management is witnessing tectonic shift in Business Environment and Business Practices. For Instance, the concept of ABC was popular in 1990s. In the present era, without underestimating the utility of ABC System, the concept of ABC system of costing has been replaced by better alternative practice Time-Driven Activity based costing (TDABC). TDABC looks fool-proof and fined tuned with the need of an hour. However, in real life it has lost some relevance with the change in facts and circumstances and changing size of business organisations The discussion on the Time-Driven Activity based costing (TDABC) will be explained with the help of example of Cases Study. The client of Management Consultancy firm is an entrepreneur who owns and manages Hotel. His Hotel provides various services: Food Services, Room Services, reception of guests, Dance floor, Event management and other related services. He has already implemented Activity Based Costing. Now he has expanded his operation by infusing $ 100 million dollars. However, he has cost escalation issue. Further, he recently attended seminar on Time-Driven Activity-Based Costing. He wants an analysis on whether he should replace Activity Based Costing System (ABC) by Time-Driven Activity based costing (TDABC) or continue with ABC system. His objective is to know the various costs exactly, control cost and expenditure and consequently increase profit margin. Description of Time-Driven Activity Based Management and its features Before 1985, Costing Systems were not advanced and were not prevalent among various Industries. However, in 1987, Cooper and Kaplan devised the concept of Activity Based Costing System (The Economist, 2018). Within few years, it became the buzzword of Corporates as it solved the cost escalation issues of thousands of companies. However, with the passage of time and advancement in Information and Communication Technology, the businesses became complex and difficult to manage (Miller, 2018). Now ABC system has lost relevance in managing large Organisations as with the passage of time activities of business have become complex. Moreover, ABC system is difficult to implement. Adding further it is difficult to maintain (Onlinemasters.ohio.edu, 2018).Secondly, ABC system became less effective as this method was not capable of taking into consideration the complexity of operations of enterprises, was expensive to install and took long time in implementation. Moreover, when employees are assessed on how much time they have spent on various activities, they report partial metrics as they do not disclose idle or unused time (Simplestudies.com, 2018). So, in ABC System, full capacity is assumed that provides biased results and biased interpretation (Oklu, R., Haas, D., Kaplan, R., Brinegar, K., Bassoff, N., Harvey, H., Brink, J. and Prabhakar, A., 2018). This leads to assessing of cost-driver rates that are too high and wrong. However, TDABC considers realistic figures by deducting idle time of chats and other informal activities. In TDABC, management assesses resource demand as per each transaction, customer or product rather than assigning resource cost to the activities in the first step and then to customers or products. Moreover in TDABC only two parameters are considered: Cost per time unit of supplying capacity of resources and unit times of consumption of resources by customers, services or producers (Kaplan and Anderson, 2006). The fact that ABC System has disadvantages doesnt mean it has no utility (Barndt, Oehlers and Soltis, 2018).ABC method has solved dilemma of hundreds of companies (Campanale, Cinquini and Tenucci, 2018).Consequently Time-Driven Activity Based Costing (TDABC) was devised by RS Kaplan and Steven R.Anderson in the year 2004 and soon became popular and replaced traditional ABC.TDABC takes into consideration duration cost drivers (hours or minutes) in place of Transaction cost drivers (number of Bills processed). Only two yardsticks are required in TDABC: cost per time unit for supplying resources and the unit times of usage of resource capacity by products, customers and services (Tibor, L., Schultz, S., Menaker, R., Weber, B., Ness, J., Smith, P. and Young, P., 2018).The ABC system has assisted many organisations by improving processes on Shop floor, low cost designs of products and other benefits (Bahnub, 2010). Difference between ABC System and TDABC In ABC system, Decision making takes place at product level while in TDABC decisions takes place at both product level and process level (Wiese, 2009).In ABC System, the focus is on financial measures whereas in TDABC focus is on non financial measures(Kaplan and Cooper, 1998). Illustration showing contrast between Activity Based Costing System and Time-driven Activity Based Costing ABC System Time-driven Activity Based Costing The input of ABC System is transaction cost driver (for instance number of Accounts Payable invoices processed). In ABC System it is assumed that Accounts Payable Clerk incurs following costs: $10 per invoice processed and $ 6 per credit Application. Further it is assumed that 14,000 Accounts Payable in invoices and 10,000 credit Applications have been processed by Clerk. The input of TDABC System is duration cost drivers (for instance hours or minutes). Under TDABC it is assumed that it takes about 7 minutes to process an Accounts Payable Invoice and 6 minutes for applying to Credit Application. So the Unit cost as per TDABC is as follows: Cost of input resources/Practical Capacity =Cost of Input Resources/ Practical Capacity = $2,00,000/2,12,160 minutes = $.94 per minute So Cost of Processing an Accounts Payable Invoice = (7 minutes) ($.94 per minute) = $6.58 per invoice Cost of Applying for one credit application (6 minutes) ($.94 per minute) = $5.64 per credit application. How the figure of 212,160 has been calculated? Capacity of clerk is limited to 249,600 minutes per annum, however, under TDABC capacity of 212,160 minutes per annum of clerk has been considered. Reason being in Reality, it is impossible that the entire time span of 249,600 minutes will be utilised by clerk in production. Reason being, in the real scenario, it is impossible that entire time span of 249,600 minutes will be utilised in productive activities relative to production. Clerks will also consume some time in taking lunch, chatting with peers, attending phone calls etc. Consequently, employee will not utilise all available 249,600 minutes. In reality, clerk will utilize 85% of 249,600 units i.e. 212,160 minutes in production. Time consumed in Production = (14,000) ($7) + (10,000)(6)=1,58,000 minutes. However total productive capacity of clerk has been determined at 212,160 minutes. But actual time used in production is 158,000 minutes. Difference=212,160-158,000= 54,160 minutes. So 27,080 minutes is non productive time. So unutilised capacity of clerk = [54,160/212,160] (100) =25 per cent. This 25 per cent unutilised capacity will be favourable if clerk has done some other job which doesnt fall under his duty. Otherwise 25 per cent time would be unfavourable for company. ABC Method suffers from other limitations also. Other features of TDABC TDABC is in widespread and used to a great extent across the Globe.However, Critics disfavours ABC System as it is not suitable for complex operations. The focus in TDABC is on time equation.Product Costing Systems are the core ingredients in many management processes like Budgeting, Price Setting etc. It is virtually impossible for business to calculate error-free product costs. TDABC is not a complicated model but it accommodates complicated transactions that can be easily installed and can handle complex situations. Moreover, it is easy to maintainit andits scope can be enlarged whenever there is requirement. In the present era, TDABC can be labelled as most apt and perfect cost model. It takes into consideration only two parameters: per unit cost of providing capacity and estimating the time that is needed to perform an activity. Phases in Time-driven Activity based costing Calculating Departmental Costs TDABC ignores taking employee survey results and then assign cost of resources to cost pools. In the first step cost is accumulated at the department level for the purpose of determining unit cost of capacity. Departmental Costs includes the following costs: Salaries of employees along with fringe benefits. Salaries related to supervision work Salary of Indirect labour The wear and tear i.e. depreciation on technology equipments that are used by employees and supervisors of Organisation. Occupancy cost of supervisor and employees Other related costs to support company functions. What should be done or emphasised? Sustaining expenses of organisation should be considered. The above-mentioned costs are difficult to trace to operating units. TDABC analysis should be extended to shared services. Calculating Practical Capacity TDABC utilises time to drive cost. Capacity is measured in time (seconds, minutes or hours) that employees have to use for executing activities related to work (Haron, 2010). Total Capacity is measured in machine hours available multiplied by number of employees. But the time allotted is not the total time utilised in performing activities. Employees will use some time in chatting with peers and other informal activities(Kaplan and Anderson, 2007).So Machine hours should be reduced after considering informal activities to reach the figure of Practical Capacity. Identification of Activities The next step is the identification of activities that are performed in each department. The activity dictionary of ABC system is helpful in identifying the processes. Flow charts and narratives can also be prepared. With the adoption of TDABC employee survey have been replaced by estimates of the time or capacity that is required to perform an activity and present it in terms of equation. The equations includes base time that is required to process a transaction along with time required for variation in the activities that would be witnessed.Commonly, Equations are formed by starting with principal factor of transaction and then adding variables. It is better to start with the most costly processes. After defining processes, the important variables or drivers that consume time are identified. In the first step, it is easier to use driver data that has been previously collected instead of developing and expanding data collection facilities. The format of time equation is as follows: Depending on the resource availability, transaction base times along with time required to accomplish each variable can be determined. Industrial engineering data of time and motion studies provides valuable information. The two approaches for data gathering and observation are employee survey and observation of the transactions being processed and then taking into consideration average time. TDBAC takes into consideration less data in comparison to ABC System. However, TDABC requires transaction data on customers, products, orders and other cost objects. Companies that have installed Enterprise Resource Planning already process rich data. Rest of the organisations have to invest in the necessary technology. It is better to start with test drive: pilot study or small-scale implementation. The advantage of TDABC is that time equations can be updated for improvements. Conclusion So Time-Driven Activity based costing is suitable for the client who is the entrepreneur, manages the hotel and is currently planning to expand operations by infusing funds. Company is also facing cost escalation issue. Further, Time-based Activity Based Costing in the above-mentioned hotel has lost relevance since the hotel considered will operate on large scale. ABC is very difficult to utilise in case of large organisations. Last but not the least, It is better to implement TDABC since company is facing complexity in operations due to expansion. References: Bahnub, B. (2010). Activity-Based Management for Financial Institutions: Driving Bottom-Line Results. Indianapolis: Wiley. Barndt, R., Oehlers, P. and Soltis, G. (2018). Time-Driven Activity Based Costing: A Powerful Cost Model. [online] Tscpa.org. Available at: https://www.tscpa.org/docs/default-source/default-document-library/activitybasedcostmodel_marapril2015.pdf?sfvrsn=2 [Accessed 4 Jan. 2018]. Campanale, C., Cinquini, L. and Tenucci, A. (2018). Time-driven activity-based costing to improve transparency and decision making in healthcare | A case study | Qualitative Research in Accounting Management | Vol 11, No 2. 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Available at: https://www.mhlnews.com/transportation-distribution/abcs-activity-based-costing-logistics [Accessed 4 Jan. 2018]. Oklu, R., Haas, D., Kaplan, R., Brinegar, K., Bassoff, N., Harvey, H., Brink, J. and Prabhakar, A. (2018). Time-Driven Activity-Based Costing in IR. [online]Journal of Vascular and Interventional Radiology. Available at: https://www.jvir.org/article/S1051-0443(15)00660-0/abstract [Accessed 4 Jan. 2018]. Onlinemasters.ohio.edu. (2018). Using Activity-Based Costing (ABC) to Increase Profitability | Ohio University. [online] Available at: https://onlinemasters.ohio.edu/using-activity-based-costing-abc-to-increase-profitability/ [Accessed 4 Jan. 2018]. Simplestudies.com. (2018). A different approach to activity-based costing (ABC) - Accounting guide | Simplestudies.com. [online] Available at: https://simplestudies.com/different_approach_to_activity_based_costing_abc.html/page/2 [Accessed 4 Jan. 2018]. The Economist. (2018). Activity-based costing. [online] Available at: https://www.economist.com/node/13933812 [Accessed 4 Jan. 2018]. Tibor, L., Schultz, S., Menaker, R., Weber, B., Ness, J., Smith, P. and Young, P. (2018). Improving Efficiency Using Time-Driven Activity-Based Costing Methodology. [online] Journal of the American College of Radiology. Available at: https://www.jacr.org/article/S1546-1440(16)31323-0/abstract [Accessed 4 Jan. 2018]. Wiese, N. (2009). Activity-Based-Costing (ABC). Munich: GRIN Verlag.