ABC 2: time-driven activity-based costing

Accounting Ahead | Original study resource | accountingahead.com.au

ABC 2: time-driven activity-based costing

MODULE 6 | PART B.2.2 | STUDENT COMPANION

Time-driven ABC in five steps

1. Total cost

Cost of the capacity

paid for

2. Practical

capacity

Theoretical time less

breaks, meetings,

training

3. Capacity cost

rate

Cost / practical

capacity

4. Activity cost

Unit time x capacity

cost rate

5. Unused

capacity

Practical capacity

less time used

Finding the capacity cost rate

Theoretical capacity: 8 officers x 150 hours x 60 minutes 72,000 minutes

Practical capacity at 85% 61,200 minutes

Monthly cost of the team $91,800

Capacity cost rate: $91,800 / 61,200 $1.50 per minute

Harbourline Bank home loan team (imagined)

Used and unused capacity - Harbourline Bank (imagined)

Activity Minutes

each

Cost each Volume Minutes used Cost

Assess application 90 $135 400 36,000 $54,000

Answer query 12 $18 900 10,800 $16,200

Settlement documents 40 $60 300 12,000 $18,000

Total used 58,800 $88,200

Unused capacity 2,400 $3,600

Practical capacity 61,200 $91,800

Why TDABC? Conventional ABC relies on staff surveys and many drivers, so it is costly to build and maintain.

Kaplan and Anderson's time-driven version (book, 2007) needs only the cost per time unit of capacity and the

STRATEGIC MANAGEMENT ACCOUNTING | M6 PART B.2.2 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

time each activity takes, is easy to update, and shows unused capacity. Kaplan and Porter (Harvard Business

Review, 2011) proposed it for costing patients' full cycle of care.

Formulas and rules

Item Formula or rule

Theoretical capacity All paid time (e.g. staff x hours x 60 minutes)

Practical capacity Theoretical capacity less non-productive time (often estimated at 80-85%)

Capacity cost rate Cost of capacity supplied / practical capacity

Activity cost Unit time x capacity cost rate

Unused capacity (Practical capacity - time used) x capacity cost rate

Over capacity? Time used above practical capacity signals overtime, delays or a bottleneck

Question 1 - Bayview Council rates team (imagined)

Five officers are each paid for 140 hours a month. Practical capacity is 80%. The team costs $57,120 a month.

Activities: payment arrangements 20 minutes (600 a month), rates enquiries 8 minutes (1,500), property

transfers 45 minutes (150). (a) Calculate theoretical and practical capacity. (b) Calculate the capacity cost rate.

(c) Cost each activity and find the cost of unused capacity.

STRATEGIC MANAGEMENT ACCOUNTING | M6 PART B.2.2 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 6 | PART B.2.2 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Worked answer

Item Working Result

(a) Theoretical 5 x 140 x 60 42,000 minutes

Practical 42,000 x 80% 33,600 minutes

(b) Rate $57,120 / 33,600 $1.70 per minute

(c) Payment arrangements 20 x $1.70 = $34; 600 x 20 = 12,000 min $20,400

Rates enquiries 8 x $1.70 = $13.60; 1,500 x 8 = 12,000 min $20,400

Property transfers 45 x $1.70 = $76.50; 150 x 45 = 6,750 min $11,475

Total used 30,750 minutes $52,275

Unused capacity 33,600 - 30,750 = 2,850 minutes $4,845

Check $52,275 + $4,845 $57,120

STRATEGIC MANAGEMENT ACCOUNTING | M6 PART B.2.2 | WORKED ANSWERS

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