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What are the most significant differences between traditional rate-based ABC and TDABC?

Traditional activity-based costing developed during the 1980s. This development was driven by increased variation and complexity in product and service offerings and thus an increased share of indirect and shared costs. In traditional activity-based costing, operating costs are typically allocated to the cost object with a single operational driver, which causes the cost to be realized (e.g. number of orders, number of set-ups). Increasing the accuracy of the calculation is done by splitting the activity library into smaller parts, but this increases maintenance challenges of the model (splitting resources for different activities, measuring time used by activity, and driving operating costs to cost objects). Based on the cost objects, the costs are classified typically as product or customer specific and the calculation is made in silos selected in this way, which then are combined to come up with the overall picture of profitability.

The second generation of activity-based costing, TDABC (time-driven activity-based costing), was born at the turn of the millennium to meet the challenges of traditional ABC.  TDABC is a transaction-based calculation method where business modeling is done at a level that truly drives resource utilization. This enables multi-channel calculation from the beginning, giving the advantage of not calculating costs in silos. How would it be possible to calculate the exact product cost without taking into account differences in customer ordering behavior? The customer’s ordering behavior can have a big effect on the picking activity, for example, each customer can have a different picking cost for the same product. The ordering behavior indicates whether the product needs to be collected unit by unit, in separate boxes or in full pallets and how the picking has to be done. All possible variations of the picking process can be modeled with one time-equation without a need for time usage interviews. The input data for the process drivers comes directly from the transaction data in the ERP system or data warehouse. With TDABC, the accuracy of the calculations and the efficiency of maintenance are substantially increased. As a result, TDABC also measures the capacity utilization by processes, which can be very powerful e.g. in resource management, operational development, and in pricing decisions.

Both methods of activity-based costing are a big leap forward from traditional or gross margin-based calculations and provide management with valuable information to support business development and decision-making. Advanced calculation engines are able to handle multiple different allocation and calculation methods that best support the company’s modeling needs.

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Here is a more comprehensive article on the subject: post-entry / february-2016-time-driven-or-driver-rate-based-abc /

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ABC, Activity Accounting, TDABC, Time-Based Activity Accounting, Cost Accounting