Analyzing the Time-Driven ABC Model

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Theories and models are rarely considered a complete success on the first go. In order for to be fully recognized, they undergo a great deal of skepticism and are tried for success or failure. This will be an examination of Robert Kaplan’s Activity-Based Costing, and how this system had to be built upon with Time-Driven Activity-Based Costing in order to solve inherent issues. Such a development will ultimately lead to more efficient time management practices that benefit both a company and its employees.

The Drawbacks of Traditional ABC Systems as Kaplan Described Them

While the advent of Activity-Based Costing led to a greater understanding of how to efficiently manage a business, some facets were deemed impractical. To begin with, the measuring the impact ABC had on employees was a difficult process. The surveys were found to be “time-consuming and expensive to perform.” (Gilbert) In his interview with Sarah Jane Gilbert, Kaplan notes the impact this had on employees and their attitudes towards the work, preventing them from working as efficient and leaving his system flawed.

Both Kaplan’s article and his interview with Gilbert note that capacity was a factor not considered fully with the first model; it turned out to be the biggest error that needed attention. In his article he mentions that “the capacity of most resources is measured in terms of time availability.” (Kaplan and Anderson) It’s practically impossible for people or machines to work at their full capacity all of the time. Because ABC did not take this into consideration, Kaplan had to more effectively utilize the component of time into his model.

How Time-Driven ABC Addresses the Drawbacks of the Traditional ABC System

Time-Driven ABC, also known as TDABC, was a system that Kaplan developed in order to compensate for the ways in which ABC fell short. As noted earlier, capacity was not fully considered initially. Since he considered it a measurement of time availability, turning ABC into a time-drive model became a direct solution to fixing a critical problem; the hope would be that this would solve other issues in return. Since employees and equipment cannot work at their full capacity all the time, there is room for unused potential. Kaplan and Anderson note that “managers can review the cost of the unused capacity and contemplate actions to determine whether and how to reduce the costs of supplying unused resources in subsequent periods.” (Kaplan and Anderson) So, with a better layout of where and how much their resources are being used, these managers can use ABC more effectively to run their business.

How TDABC Ties into Enterprise Resource Planning (ERP)

Kaplan very succinctly describes the relationship between these two systems in his interview with Gilbert. In an age where technology handles most of our data, the ability to easily exchange data between the two is paramount. Kaplan discussed how managers can quickly use the data from ERP to augment their TDABC process, and one can imagine that this would not only benefit a company’s month-to-month planning, but long-term development as well.

The Problems Not Addressed by TDABC

In spite of being a solution to the issue of capacity as a time measurement, TDABC still doesn’t appear to solve the issue of measuring employee impact through surveys. This raises certain questions, such as: would the model’s accuracy be misrepresented because of an employee’s willingness to go through the necessary testing? If this is the case, then researchers like Kaplan will struggle to know of the models true effectiveness. In the end, TDABC is still just a theory, which will hopefully continue to be developed to best serve business management. 

Works Cited

Gilbert, Sarah Jane. "Adding Time to Activity-Based." Harvard Business School. (2007) https://hbswk.hbs.edu/item/adding-time-to-activity-based-costing

Kaplan, Robert S. & Anderson, Steven R. "Rethinking Activity-Based Costing." Harvard Business School. (2005). https://hbswk.hbs.edu/item/rethinking-activity-based-costing