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1
JAMAR Vol. 8 · No. 2· 2010
between the two methods by the fact that in the analysis will be made by means of a case study
ABC method employees are asked how long concerning one of the rare European
they spend on different activities in order to companies to have been using TDABC for
link costs with the activities, while in the several years
TDABC method, the time taken to perform
elementary tasks is simply estimated and We first recap on and critically appraise the
multiplied by the number of tasks and then by advantages of TDABC put forward by its
the hourly cost5. promoters. The methodology and results of the
case study are then presented.
The main advantages of TDABC put forward
by its designers are that it provides an answer
to the shortcomings of the ABC method: long Critical Appraisal of the TDABC
time to collect data, complex updating of the Model
system necessitating repeat interviews in order If TDABC, claims to be “more simple, less
to allot time to the activities, multiplication of expensive and much more powerful than the
the number of activities as the only way of conventional ABC method” (Kaplan and
dealing with its complexity, high data Anderson, 2007, p. 20), there nevertheless
processing capacities and statements of time remain considerable doubts about its
that never show idle capacity. It was also performance.
presented as a quick and easy costing method
for determining the ‘Whale curve’ of customer Advantages
profitability and a natural complement to the
balanced scorecard (Kaplan and Anderson, Simple to use model that takes the complexity
2007, p. XI). The TDABC method now seems of the processes into account: TDABC is a
to be mainly used by one consultancy, Acorn, costing method based on equivalences (Levant
of which Anderson is founder and director and and de la Villarmois, 2007a; Levant and
Kaplan is a board director. It is reputed to have Zimnovitch, 2008). Equivalences are
been put in place in over 200 companies established in a “resource group” by means of
(Kaplan and Anderson, 2007, p. X). a single driver; i.e. the time needed to perform
them6. A “resource group” is the aggregation
The concept of TDABC however remains of ABC activities that consume the same
unexplored in academic research. Apart from resources. The authors of this paper have
some presentations by its designers, there have devised this concept to avoid any confusion
been few academic studies of the method. We with the term ‘activity’ of the Rate-Based ABC
may only quote the articles by Bruggeman and method. Indeed, Kaplan and Anderson
Everaert (2007); Levant and de la Villarmois sometimes use the term “activity” to designate
(2007a, b); Tse and Gong (2009) and the grouping together of ‘Rated Based ABC
Ratnatunga and Waldmann (2010). There are activities’ in TDABC and call the latter
even fewer case studies, except for the ones by ‘subtasks’. In addition, failing to give
Pernot et al (2007) on the case of a university, sufficient attention to the problem of
Bruggeman et al. (2008) on the case of a homogeneity, they misleadingly assimilate
Belgian logistics company, McDonach and these resource groups to an organizational unit,
Mattimore (2008) that deals with a small a department or a section (Kaplan and
services company in Ireland, and Ratnatunga Anderson, 2007: pp. 49-52). As there are
and Waldmann (2010) who deal with normally less ‘resource groups’ than activities,
government allocation of research funding to this makes the method simpler to put in place
universities. The purpose of this paper is to and reduces errors of measurement. Another
offer a well-supported answer to the questions advantage of TDABC is that it is no longer
surrounding this new method. We will necessary to conduct regular surveys to
consider three questions: (1) is TDABC easier determine the distribution of work time
to put in place and use? (2) Does it enable between different activities, which simplifies
homogeneity to be respected? and (3) Does it
aid in management decision-making? Our 6
Capacity drivers may also be used. Kaplan and
Anderson (2007, p. 59) also consider that the
5
This denial is a direct reference to Cooper’s article method should have been called Capacity-Driven
(1997). ABC rather than Time-Driven ABC.
2
JAMAR Vol. 8 · No. 2· 2010
maintenance of the method. This is thanks to calculated, which is the cost we would have
the use of time standards. All that is needed is obtained if we had worked correctly at this
to ensure that these standards remain consistent level of activity9. The calculation of under-
with practices and are regularly updated. The activity proposed by Kaplan and Anderson and
complexity of operations is taken into account presented as an innovation therefore
using time equations to determine more corresponds to the ‘variation in volume of
accurately how much resources each group activity’ of the 1982 PCG. It is in fact equal to
consumes. Using these equations, the model is the difference between the estimated standard
easy to update; adding an extra activity (if cost of production and the actual standard cost
performed by the resource group), adding of production; due to the fact that a company
variables explaining the time spent, taking into has not worked at normal capacity. The authors
account changes in productivity, etc. no longer nevertheless recognise (Kaplan and Anderson,
present a maintenance problem. 2007, p. 36) that many companies base their
calculations on actual costs. There are several
A model that allows the cost of idle capacity to reasons for this: (i) the costs thus determined
be calculated: It is possible to compare the are not ideal costs, but they are more credible
value of used capacity to the value of available for users as they are directly based on reality;
capacity and thereby determine a cost of (ii) there is a stronger link between general
under-activity (Anderson and Kaplan, 2004, accounting and cost accounting; (iii)
2007; Tse and Gong, 2009). For each resource companies no longer have to make forecasts
group, it is necessary to make the difference (an increasingly less common practice) in
between the total cost of the available order to use the model. Kaplan and Anderson
resources and the total cost of the resources (2007) however insist on the fact that delays in
used (equal to the unit cost of the resource invoicing or book entry of charges can skew
group multiplied by the time required to the calculations. Use of periods that are not too
perform the operations performed during the short and the technique of spreading charges
period). across the financial year were ways of solving
this problem. When using actual costs, there
Issues are two alternatives10 for calculating the unit
cost of a resource group, as follows:
There are four issues that remain as questions
in this method: at a practical level: (1) there (a) The actual charges are related to the normal
seems to be some hesitation between use of time for the actual level of activity (this is the
standard costs and use of actual costs to view of Bruggeman, Éveraert and Levant,
determine the unit cost of resource groups; (2) 2005, which we call perspective 2 in this
evaluating the cost of under-activity is not so paper). Following this reasoning, the cost of
simple; (3) the need to observe the principle of idle capacity is integrated into the various
homogeneity remains with this method and resource groups. It is therefore no longer
finally, and (4) it is not necessarily easy to possible to isolate it and idle capacity can only
measure times. be taken into account in terms of time (by
comparing actual times with standard times).
Actual costs or standard costs: In Kaplan and
Anderson (2004), the unit cost of a resource (b) The actual charges are related to the time
group is a standard cost.7 If we reuse the terms corresponding to normal capacity (perspective
of the 1982 French Plan Comptable8, it was 3). The cost of idle capacity can again be
the predetermined cost of production that was costed. Its cost is a percentage of the actual
charges.
7
The authors have the same attitude in their article.
Limitations of the calculation of the cost of
8
Since 1942, French companies are bound by law to idle capacity: TDABC is presented by its
prepare their accounting documents according to designers as having the advantage of
standards contained in the Plan Comptable Général
(PCG), of which there have been several successive
9
revisions. The 1982 PCG modified accounting rules For a full demonstration, see: Gervais, 2009: pp.
in depth. It was the last Plan Comptable to deal 238-239.
with management accounting (see : Standish, 1997).
10
For more details, see: Gervais, 2009: pp. 240-241.
3
JAMAR Vol. 8 · No. 2· 2010
introducing the measurement of the cost of performed in one resource group should
under-activity. This is not specific to TDABC. consume resources in the same proportions
Kaplan and Anderson are only repeating the (condition of homogeneity) (Gervais, 2005, p.
arguments in favour of calculating the cost of 230). They give as an example an operating
capacity sometimes suggested in ABC (Cooper theatre in a hospital which has special
and Kaplan, 1991a, b, 1992; Robinson, 1990). equipment for open-heart surgery. In this case,
Furthermore, outside of studies of ABC the open-heart surgery process must be
irrespective of the version, processing the cost separated from other types of surgery, as
of idle capacity is not a recent discovery11. the resources used and the rate at which
After the work by Church (1901), Gantt they are used are not the same.
presented this principle in its present form as
early as 1915. According to Garner however
(1954, p. 235), there was nothing new about it.
The critics and users of the method do not
Gantt himself said at a congress that he had appear to be aware of the importance of
studied the question “not because the ideas this condition. To show the consequences
were absolutely new, but because they are of of neglecting this condition, an illustration
such great importance to manufacturers, and is given in appendix 112. As in other full
are apparently so little understood by many of costing methods (ABC, sections
them” (Gantt, 1915, p. 9). In addition the IFRS homogènes13), for the calculation to be
2 standard recommended taking the normal correct, the time consumption of products
level of activity of the production tools into must remain proportional to the average
account for stock evaluations. consumption of the cost pool. The times
used being standard times, any major
A normal level of activity is not simple to
define. Is it the theoretical capacity, the normal
changes to the production process and
capacity, the budgeted capacity or practical productivity gains must be carefully
capacity? monitored, as these changes could alter the
proportionality between times and thus
“Considerations of a strategic nature (need to break the homogeneity. Rigorous
economize materials today in order to meet the maintenance and regular revision are thus
forecasted needs of tomorrow), of a social necessary. These conclusions are not
nature (activity times are dependent on social conducive to a simplification of the
policy) or of an organizational nature method.
(bottlenecks owing to the impossibility to
separate certain production equipment or to Problem of measuring time in a time-based
poor organization of the workstations) are model: Use of the labour hour as a rate was
confused with purely technical aspects (the much criticized by the supporters of the ABC
potential indicated by the manufacturer of the method. The direct labour hour as a means of
plant)” (Gervais, 1994, p. 76). sharing indirect charges was no longer in
keeping with changing production technology
Kaplan and Anderson (2003, 2004) propose a and the value creating process of organizations
practical capacity in the order of 80 % of the (Johnson and Kaplan, 1987; Lebas, 1995;
theoretical capacity for labour hours. This Lorino, 1989; Mévellec, 1993). In saying this,
figure, which is unsupported, is the same as the the authors were referring to considerably
one used by the management of General automated industrial activities. The problem is
Motors in the 1920’s, considering it as the not the same when we consider service
maximum rate of use of capacity in the long activities where labour remains an essential
term (Bouquin, 2006, p. 1). resource. TDABC sets out in particular to give
The problem of homogeneity: Kaplan and 12
Anderson (2007, p. 49) themselves insist on See also: Gervais, 2009: pp. 242-243.
the fact that the ‘activities’ or transactions 13
The French sections homogènes method is a full
costing method which deals with indirect charges
11
For the history of the development of costing idle through cost centres. It resembles the German
capacity, see: Bouquin, 1997; Lemarchand, 1998 methods, see: Cauvin and Neuman, 2007 and Lebas,
and McNair and Vangermeersch, 1998. 1994, for a detailed presentation.
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JAMAR Vol. 8 · No. 2· 2010
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JAMAR Vol. 8 · No. 2· 2010
Marketing and market research: The markets In the 1990’s, the company’s main control
on which Sanac operates are governed by a instrument was its turnover, without
need for high productivity. Feedback from the considering the profitability of its various
technical and sales personnel or truck drivers is customer groups. By the end of the decade, the
therefore a precious source of information for sales policy had focused on garden centres, a
keeping in touch with customers and avoiding new sector, while tending to abandon the other
unsold goods. sectors. The company did not however know
the cost of this new activity, nor the resources
Logistics: This is important as the customers invested in it. In spite of a high increase in
are either in the retail trade, where any late turnover (almost 70% in 4 years) and stable
deliveries can result in lost sales, or farmers gross margins, the global profits were seen to
and horticulturalists for whom fast delivery is decrease. To solve this problem, Sanac was
essential in order to keep their production seeking to calculate its profitability per sector
going. in terms of full costs. The existing cost
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JAMAR Vol. 8 · No. 2· 2010
accounting only allowed the margin on direct small farmer does not generate the same
costs to be calculated. The unallocated indirect gross margins or the same costs as the
charges (2.5 million Euro in 2000) were gardening department of a large retailer. A
however high, and these costs, normally Rate-based ABC system required too many
considered as fixed, were increasing. An activities.
approximate calculation of these costs showed • The highly seasonal sales made it difficult
Sanac that the garden centre and horticulture to allot idle capacity.
sectors were unprofitable, while agriculture
was profitable. The sector where there was the The implementation of TDABC took
most growth and on which Sanac wished to approximately 3 months. The 200 activities
focus on was the least profitable. Sanac required by Rate-Based ABC, were reduced to
changed its focus, but this new focus was not 150 resource groups (delivery, picking16,
financially controlled either. The aim of the invoicing, etc.). Overall, the TDABC model
company was therefore to improve its contained 106 time equations17. 61 % of the
profitability, i.e. to switch from logic of growth time equations contained several drivers (they
(keeping a wide range of goods in stock so as represent 53 % of the resources), 31 %
to deliver all its orders as quickly as possible to contained interactions between drivers (they
all customers irrespective of the quantity for a represent 21 % of the resources)18.
fixed price) to logic of profitability. Sanac thus
wanted to know its costs per product, per By way of illustration, we have given the time
customer and even per delivery. All these equation for the ‘deliveries’ resource group.
efforts aimed to improve the service rendered The times required in this group depend on
and to favour customers that generated value. numerous variables or time drivers: the type of
To achieve this, it was necessary to have a customer, type of delivery, by appointment or
reliable system to measure costs and not… The standard unloading time is thus 5
performance. minutes per delivery to farmers. When the
delivery is being made for the first time, an
Sanac started with a conventional Rate-based extra 5 minutes are required (interaction
ABC system, but quickly realized that this between 'delivery to a farmer or not' and 'first
system could not work. There were several time delivery or not’). If there are goods to be
reasons for this: returned, this will take another 5 minutes, etc.
The term 30 X3.X6.X12 indicates that there may
• The manager wanted to have real monthly be interdependence between time drivers; e.g.
data per segment, per product, per goods to be returned to retailers involves
customer and per invoice. This was only calling the company to obtain a returns code.
possible if he hired 10 employees; This takes 30 minutes.
• The rapid growth of the garden centre
market meant that Sanac had to adapt By using several time drivers (and any
immediately to customer requirements. interdependence between them) to explain the
These particularly concerned price and time spent, the variety of situations can be
service moderations. In this type of accounted for without making the system any
dynamic environment, maintenance of the more complex. With Rate-Based ABC, it is
cost model is complex. With the existing necessary to create as many activities as there
human resources in the control department,
it was impossible to update quickly enough; 16
This involves taking the goods from the shelves
• The great diversity of customers and according to the order form and thus forming the lot
products generated too much work to to be dispatched.
ensure the traceability of costs. Sanac had 17
7,000 customers, a portfolio of 7,000 There are some equations which are not time-
products in stock and 20,000 on catalogue, based. For example, the cost of the use of trucks for
delivery rounds depends on the number of
received 298,000 orders per year and
kilometres travelled. The cost depends on the type
raised 69,000 invoices. There was a great of truck used multiplied by the number of
diversity of cost prices according to the kilometres travelled in the delivery round.
products (packaging, type of product, etc.)
and according to the customer (delivery 18
Interdependence between drivers is often a
method, advice, terms of payment, etc.). A problem (Thomas and Gervais, 2008).
7
JAMAR Vol. 8 · No. 2· 2010
are possible cases. From 2004, use of TDABC renegotiation of selling prices and encouraging
at Sanac was beginning to reap some benefits. certain customers to change their behaviour in
Among these were: reduction in the number of terms of payment terms and service demands.
customers and number of products,
Sanac was bought out by a group which is stock and 15,000 on catalogue. In 2007, 8,770
Belgium’s main supplier to the farming and customers placed orders.
horticultural sectors. It operates in the retail
trade and owns the largest chain of garden Further to the buyout, the group left Sanac in
centres in Belgium. It employs 1,600 people charge of its costing system. It only had
and in 2007 made profits of 14 million Euros reporting obligations. Three people are now in
for a turnover of around 900 million Euros, charge of TDABC: the controller, an
which puts it among the top 100 Belgian agronomics engineer and business analyst who
companies. The buyout was due to the are in charge of analyses and reporting, and a
retirement of the former manager who did not computer engineer. The present team is not the
leave a successor and who considered that an same as when the system was launched. The
independent family business such as Sanac tool put in place in 2004 however continues to
could not continue alone in the current be used, with some updates. These updates are
environment, the trend being to eliminate small facilitated by the fact that the business analyst
retailers from the sector. Under its new is a trained engineer, has been with the
ownership, Sanac’s turnover dropped owing to company for some time and sits on the
the withdrawal of part of its technical activities, company management committee. He cannot
and part of its “garden centre” customers. Its however be informed of all the changes that
activity is now focused on the professional can take place in the firm’s organization.
market (80%). The remaining 20 % are
attributed to garden centres (15% in DIY shops Maintenance mainly concerned the following
and 5% in other stores). Sanac’s turnover items:
however stabilized in 2007 to the same levels • Some errors in the activity times were
as in 2006 (around 50 million Euro), while its noted. The time calculated using a standard
payroll and logistics capacities remained seemed wrong compared to the time
unchanged. After the downturn of 2005 and available. This observation also entailed
2006, its profitability improved and the firm changes to certain times in the equations.
now distributes products from a fertilizer and Approximately 5 to 10 equations are
compost manufacturing group. Sanac now habitually changed each year;
raises 67,000 invoices for 98,000 orders and
322,500 order items. It has 6,800 articles in
8
JAMAR Vol. 8 · No. 2· 2010
• Changes were also made to take into warehouses (Wervik, Roesalaere, Lochristi,
account the reorganization of the logistics Mechelen) still had its own time equation,
process. Orders are now transmitted to of the type aα + bα X1 + cα X2, where aα is
suppliers via EDI. The grouping of orders the time to prepare an order line in the
was restructured. A new system to manage warehouse, α ; bα and cα the standard times
deliveries is currently being tested; an on- due to time drivers X1 and X2 again in
board computer indicates the activity of warehouse α. We now have a single
the drivers in real time. In addition, a equation of the type a + b X1 + c X2. The
number of charges considered up to now as standard times specific to each warehouse
indirect charges and evaluated according to have been replaced by a weighted average
the time equations will become direct time (a, b or c) calculated from the data
charges related to each customer per from the four warehouses.
delivery;
• The number of equations was reduced by The characteristics and organization of the
joining up processes that were in warehouses are however very different (see
continuity with each other. For example, Table 1). Specific equations had initially been
picking and repackaging were merged in used in order to benchmark the warehouses
the depots; according to the types of customers. This
• Some equations were also simplified or the analysis having been completed, they now
number of equations reduced, by using serve to avoid a customer appearing
standard times resulting from averages. unprofitable because it is delivered from a
Thus, for the ‘picking' resource group in warehouse that is less efficient.
2004, each of the company’s four
In total, the number of equations was reduced The TDABC system does not serve to draw up
by one third. In spite of this maintenance, budgets or to analyse investment projects.
evaluated at one week per man per year, the There is a threat to the system. An ERP is to be
company questioned the pertinence of the time put in place in the group in coming years. This
equations put in place in 2004, and whether may entail a need for uniformity in the costing
they continued to be valid in 2008. Uncertain system, while Sanac is the only company in the
costs may entail errors in commercial or group to use TDABC.
strategic decisions. The question of the cost of
the increasing complexity of the system in Actual costs or standard costs: Actual costs
relation to its reliability was however raised. are related to normal time for the actual level
Costs are obtained at eight different levels of of activity, which does not allow the cost of
detail (see Figure 1 below). The level ‘Main idle capacity to be calculated. The company
categories of client (professional, non- does not consider this a problem. The main
professional)’ which is not shown in Figure 1 issue for them is to appreciate the degree of
is little used. The costs per supplier and per occupation of their capacity in terms of time.
article are the most used. The resulting actions
rarely involve abandoning a product, but are The problem of homogeneity: Activities were
more likely to be pricing policy changes, grouped together to make the work quicker and
alongside changes to the sales policy and more easier. As we have already said, the number of
follow-up of customers. equations was reduced by one third. The
activities were grouped in two ways:
9
JAMAR Vol. 8 · No. 2· 2010
Process extensions. In particular, the ‘picking’ When we compare actual times with standard
resource group was grouped with the ‘delivery’ times, the difference between them is far from
resource group. The equations are now longer negligible (as much as 20% difference). These
but there are fewer of them; time functions are mainly updated when there
is a fundamental organizational change or
Identical resource groups. Identical resource when the difference between actual times and
groups with different cost structures were the times of the model is found to be over 20%.
grouped together, variety still being taken into Standard times are determined through
account in the time equation according to interviews or timing operations. Many of the
whether a task exists or does not exist. warehouse tasks are timed. As regards
deliveries, the basis used is the actual work
This second grouping was especially the case time of the drivers over a year and the number
for the warehouse resource groups, the main of deliveries made. As for the administrative
reason being that customers should not be work (for example, entering an order on
penalized because their products come from computer), interviews are conducted and the
one warehouse rather than another. In this way, plausibility of the times stated is checked. As
the unit cost of a resource group that regards short times which will always be
corresponds to an average route (that of all the approximate, the effect of this inaccuracy on
warehouses on average) is multiplied by a time the calculation was analysed. Certain
defined by a specific route (which uses employees (the sales representatives in
explicative variables specific to a particular particular) were highly opposed to accurately
warehouse). Here an error is introduced, e.g. stating their work time, and some of the more
the building costs are not the same from one senior members of staff still refuse to do this.
warehouse to another. The orders cannot be In the delivery time, the relations between the
encoded in an EDI system at the Mechelen supplier and customer were taken into account,
warehouse because Mechelen does not have since the time is counted between the arrival of
such a system. In the time equation for the delivery man at the place of delivery and
Mechelen, the EDI encoding time is therefore his departure. In the case of pesticides for
zero, which is added to the other times to example, it is necessary to take the products to
determine the total order registration time. But a special place; the first time they are delivered,
in the average unit cost of order registration, someone has to be found and asked where to
there are costs corresponding to the EDI put them (the customer is often out in the
system. Homogeneity is no longer respected fields); the standard times used take all this
and biases are introduced into the calculation. into account.
Speed is not always compatible with relevance.
Validation tests were conducted at the outset
Evaluation of times: In the warehouse, all data but there have been little verification since
is processed using scanners and bar codes and then. “I realize that there are a lot of controls
the trucks are equipped with an on-board that we no longer do. We no longer have the
computer. Therefore, it is possible to say with know-how either for this” admitted one person
great accuracy as to how many orders, boxes, we spoke to.
stores outwards operations, etc. have been
processed in one day by a particular operator. Organization of the calculation: Up until 2007,
Each change of activity involves scanning a the costs were calculated each quarter; since
bar code. At the end of a period, we can have 2008 this has been extended to every six
accurate information on how the time of a months. The software used for this calculation
particular storekeeper is shared between his or is based on a database management system
her various activities. These actual times are with single entry of data. The order line
used to distribute the accounting costs delivered to the customer is an essential item in
(operator's salary) over the activities. But to the data flow and aggregation system; it is
link the unit cost of the activity to the cost from this level of detail that groupings will be
objects, we still have time functions that use made. On one side, the order line refers to an
standard times. order, a customer and a division; on the other
side, the order line refers to an article which
itself refers to a supplier (see Figure 1).
10
JAMAR Vol. 8 · No. 2· 2010
Company
SBU
Customer Supplier
To these levels at which data is obtained there a long one. The process in fact reprocesses the
correspond as many calculation items. The data several times in order to make it
route from the entry of data in the order lines interpretable by both the time equations and by
to the calculation of the margins generated at the controller. Figure 2 shows the main steps
these various levels of aggregation is however of this route.
Warehouses
Calculation of time
Trucks equations and costs with
Suppliers Time-Driven ABC
Activities
details sheet
Production Transition
data base calculation Data
base store
Users:
• SQL requests
Multi-dimensional • Reporting
cubes • Spreadsheet
11
JAMAR Vol. 8 · No. 2· 2010
software package is based on TDABC (322,000 in 2007) and resource groups (150 in
methodology and is run on a Microsoft SQL 2007), with other analysis axes for customers,
Server database management system. The articles, etc. At the outset, the production data
system core combines various types of data: and calculated data was restored in a Microsoft
SQL Server database, whose settings
• Tasks or sub-activities, for which a time unfortunately depended on a single chart,
driver and standard time are determined; resulting in a gigantic spreadsheet like a
• Resource groups, combining several tasks worksheet without the formulae. In this
and corresponding to the functions worksheet, each order line was reproduced as
performed in the company (administration many times as there were resource groups22. In
of sales orders, management of article the columns were displayed the data regarding
references and stocks, etc.); there are the TDABC, as well as any other methods of
around one hundred resource groups, but analysis that could be envisaged. An
as some of these are duplicated in each of illustration of this architecture is given in
the four warehouses, the total nears 15020, Appendix 2.
• Support departments (IT, Management)
and operational departments (stores, etc.) Presented in this way, all the data and all the
to which are allotted real expenses levels of analysis were contained in the same
according to their nature; the expenses of chart and there were very few indexes23. It
the support departments are charged to the however lacked a chart for the years and a
operational departments; the actual times table for each type of aggregation. The
of the operatives serve to share the software could calculate the costs at a great
expenses of the operational departments number of levels using this one file. This made
between tasks and resource groups; the program very complex and explained the
• Time equations, determining for each of long response times. It gave all the data, even
the 150 resource groups a standard time21 if the users did not need such at a particular
by combining the various tasks and their level. In addition, the calculation was divided
unit standard time, into several steps and sometimes users had to
• Cost items (customers, articles and the wait for an answer from one step before being
various groupings that can be formed from able to continue. To overcome these
these), drawbacks, an indexed database was set up,
• Periods of analysis: the tool is designed to still in the Microsoft SQL Server. Now, at each
operate over one year or a shorter period; it level of aggregation, a program transfers the
is reset at zero each year, necessary data to a database containing around
twenty charts which are correctly indexed and
• Weight equations used to allocate certain
therefore easy to exploit in a multidimensional
expenses or spread others among the
analysis according to several calculation
resource groups and various calculation
objects. When everything was contained in the
items it is thus possible to redistribute a
same file, it took a week to process. It now
direct cost per customer between its order
takes 10 hours to transfer the data to the new
lines and to calculate the average
database and 15 hours to make the calculations
remuneration of the sales reps in order to
which activate around 25 million resource
smooth this cost, etc.
group-order line combinations. Aggregation
calculations are made in parallel, while
The results are presented using the Business
previously the calculations were made in
Objects decision help computer tool. The
sequence. This technological development
calculations are based on a multi-dimension
shows that to be efficient, the system for
grid whose two main axes combine order lines
20 22
For certain activities, the present trend is however In 2007, we thus had: 322 000 lines × 150
to constitute a mean value rather than a value resource groups, that is almost fifty million lines.
specific to each warehouse.
23
An index serves to access the records very quickly
21
Through grouping of activities and simplifications, without having to scan the whole chart (just like the
there are less than 100 time equations for around index of a book allows you to find the page
150 enabled resource groups. containing the word looked up).
12
JAMAR Vol. 8 · No. 2· 2010
evaluating times and costs with TDABC system becomes acceptable. At Sanac, with
cannot exist without an information system limited human resources in its finance
structured around a dedicated database. This department, use of a Rate-Based ABC model
configuration is an absolute prerequisite and was therefore impossible; i.e. owing to the
Sanac suffered from the lack of such a strong diversity of customers and products, it
configuration for several years. involved too much work to ensure that all costs
could be tracked.
There remains the problem of the highly
sporadic use of the system. The database is not Like any method based on standards and
used for six months and then suddenly it has to equivalence coefficients (Barrett, 2005;
work overtime. Nobody actually manages the Gervais and Levant, 2007) however, the
operating routes on a daily basis. When the TDABC method requires regular maintenance.
users want to use the program again, they need Kaplan and Anderson agree with this point
to ask what has changed. They have to check (Kaplan and Anderson, 2007: pp. 5-17): any
that all the data is available. Sometimes they significant change must entail an update of the
do not know how certain articles are packaged, method. TDABC obliges the controller to work
and as some time measures are impossible to close to the shop floor and understand the
estimate when distributing costs, the operator processes. A minimum of knowledge of the
has to be interviewed to know the percentage trade is necessary, as is on-going
of his/her time devoted to a particular resource communication with the operatives, together
group, etc. This preparatory work takes around with good compatibility between the
one week to complete. accounting and other management software.
As the tool remains complex, the organization
Discussion and Conclusion of the information system it is used with is an
important factor in its success.
The aim of Kaplan and Anderson (2003, 2004,
and 2007) was to propose an update of the The reliability of the method is far from certain
Rate-Based ABC method in order to quell the however. The accuracy of its time estimations
criticism that had sometimes led to the method is debatable, as it proposes to use the times
being abandoned. What is presented as the stated by the operatives when it is not possible
main advantage of TDABC is that it offers a to observe these directly. According to Kaplan
solution for reducing the complexity of and Anderson (2004, p. 133), approximations
operations using time equations that take into in the order of 5 to 10%24 may be used. They
account, simply and inexpensively, the nevertheless rely on managers noticing these
complex issues affecting costs. Our analyses inaccuracies and correcting them. Reliable
show that the tool has some much more subtle results are sometimes difficult to achieve in
advantages. We will look at our results again, practice, that is, if 100% reliability is actually
focusing on three aspects: is the TDABC the goal. At Sanac, times known to have a
method simpler to put in place and implement margin of error of less than 20% are
than the Rate-Based ABC method? How considered as acceptable. Furthermore,
reliable is the TDABC method, and how can it incorrect data may also be used intentionally to
aid in the decision-making process? give coherent signals to the sales managers.
The time equations for the various warehouses
To put in place the TDABC method are therefore identical, even though the
necessitates precise and elaborate analyses that processes are not the same. Behaviour
make this phase more lengthy and costly. On management can sometimes be more important
the other hand, use of standard times and even than costing reliability (Zimmerman, 1979;
standard costs reduces its complexity. The Hiromoto, 1988, 1991).
Rate-Based ABC method is complicated
because most of the time we consider real costs.
With the TDABC method, using standard data 24
as a starting point as well as a basis for the In their critique of the ABC method in 2004,
Kaplan and Anderson considered that times
calculations reduces the amount of data to be
declared as a percentage often generate 20% error
collected. If the economic context of the firm and thereby 25% inaccuracy on the unit cost, which
remains stable, with use of standards the is much too much.
13
JAMAR Vol. 8 · No. 2· 2010
The principle of homogeneity in TDABC is Costing idle or unused capacity is nothing new.
only briefly mentioned in the work of Kaplan It was already featured in certain presentations
and Anderson (2007, p.49), which means that of Rate-Based ABC (Kaplan and Cooper, 1998,
they do not explore all the consequences of this chapter 7). To calculate the cost of under-
problem which also sometimes appears to be activity, the authors use the concept of
ignored in practice. Time equations are nothing practical capacity, but do not give any
other than a condensed way of presenting indications of how to determine it. If the
different operating routes. They remind us that calculation is based on actual costs, it is
we can only calculate relevant costs if we have impossible to determine (see above). This is
good control of the technical input. Indeed, it is the case of Sanac, but it is not a problem for it.
tempting when putting in place a cost In the services sector, the capacity provided
accounting system, to shorten the study phase corresponds to the estimated demand; this
and try to save on resources by paying little demand may however be unpredictable and
attention to operating routes and overusing irregular. The problem is how to manage these
approximate cost breakdowns. variations, and to do so, it is sufficient to know
the degree of occupation of capacity. Seen
This in-depth knowledge of the production
from the angle of cost management, putting a
process, which is in itself a positive factor,
value on under-activity is not necessarily a
does not however mean that the various
decisive advantage.
production routes included in a time equation
for a particular resource group do not need to In the end, TDABC may be nothing other than
be an acceptable reflection of the average route a traditional costing method based on standards
which lies behind the total cost of the resource and equivalence coefficients to which its
group in question. If this is not the case, the designers have tried to add idle capacity
unit cost of the resource group will include costing, which cannot always be used in
costs that certain routes do not consume or that practice. While TDABC may not be a new
they consume in different proportions to the method in itself25 in relation to Rate-Based
average route. The cost of these routes (or cost ABC, Rate-Based ABC and TDABC are not
objects) will be biased, as we will multiply mutually exclusive (Barrett, 2005; Levant and
their standard time by a unit cost containing de la Villarmois, 2007b). A Rate-Based ABC
costs that do not pertain to the route or that are model may in effect use a TDABC model for
over or under-represented in relation to what part of its activities only, such as for example
the route actually consumes. If homogeneity is homogeneous and repetitive activities.
respected, there are no more breakdowns than
Furthermore, because the driver is almost
in the Rate-Based ABC method, as the
exclusively work time, we may nevertheless
resource group may be a very small sub-set.
ask if the real issue is not about controlling
When the company attempts to use larger
employee time. In guise of cost management,
categories, it no longer has total homogeneity;
we are actually essentially controlling labour
thus over simplification can result in loss of
time. This more or less brings us back to
relevance.
"Bedaux points"26. This can be accentuated if
The main use of TDABC appears to be to technical progress allows us to replace
calculate costs with a view to determining the standard times with actual times. This could be
operating results via a comparison of selling the case with Sanac where the information
prices, in spite of the attempt of its authors to systems put in place allow the activity of the
put the cost of idle capacity in the perspective sales personnel, drivers and picking staff to be
of a Lean Management approach (Kaplan and monitored in real time. Even if the controllers
Anderson, 2007: pp. 123-148). The case of consider that replacing standard times by
Sanac confirms these assumptions. The actual times in accounting tools is not yet with
TDABC method is designed to be used to draw us, they are still aware of this eventuality and
up a ‘whale curve’ or ‘Kanthal curve’. Sanac
was thus able to refocus its activities by
reducing the number of customers and 25
products deemed to be unprofitable and See the firsthand accounts by Barrett, 2005 at
renegotiating the terms of sale with many Unilever and HSBC.
others. 26
See Levant and Nikitin, 2009.
14
JAMAR Vol. 8 · No. 2· 2010
the consequences such a change could have on Cardinaels, E., and Labro, E., (2008), "On the
human relations. Determinants of Measurement Error in Time-
Driven Costing", Accounting Review, 83(3):
pp. 735-756.
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JAMAR Vol. 8 · No. 2· 2010
To arrive at these costs, we need to know the Let us suppose that the standard manual order
total costs of each activity and the volume of entry times correspond to the actual times. The
the drivers consumed by each category of automatic processing activities in principle
customer (that is 2 + (2 x 4) = 10 items of data). consume a little less labour time (10,000
We need to add 4 items of data on the number minutes overall during the period), and the
of orders, if we want to know the unit cost time function of the order processing
allotted to each type of customer. If however department is as follows: Basic P (1 mins) +
the company uses standard operating routes to Product A specific P (1 mins) + Product B
calculate its costs, it suffices to know the total specific P (2 mins) + Product C specific P (4
costs of each activity and the actual number of mins) + Product D specific P (11 mins). If the
orders for each type of customer (that is 6 actual costs are related to the normal time for
items of data). If we opt to use TDABC, it is the actual level of activity (perspective 2), the
tempting to only use one resource group, i.e. order processing cost per minute is: 51 170 /
the order processing department. In this case, (99 000 + 10 000) = $0.46945. The costs
we would only need to collect 5 items of data allotted to each type of customer are presented
for each period: the total cost of the resource as shown in Table 1C.
group (1) and the number of orders per type of
customer (4).
18
JAMAR Vol. 8 · No. 2· 2010
By calculating costs in this way, the cost of employee works for 20 days per month and 6
idle capacity and productivity gains in relation hours per day (on account of breaks, absences,
to the standards cancel themselves out (use of training leave and meetings). The monthly
actual costs does not allow these to be costed), order processing capacity in the department is
as the deviations can only be due to a problem therefore: 16 × 20 × 6 = 1 920 hours or
of homogeneity. 115 200 minutes. In this case, the cost of one
minute of order processing is (51.170 /
We will now consider perspective 3 of the 115 200 =) $0.444184 and the results are
method (calculation of the cost of under- shown in the Table 1D.
activity). Let us suppose that the department
employs 16 people. On average, each
Not allotting idle capacity to the products does specific P (2 min) + Product C specific P
not fundamentally change the skewing of the (4 min) + Product D specific P (11 min).
results due to non-homogeneity. For the
calculation to be relevant, two resource groups • One equation for automatic processing,
are necessary, manual entry and automatic based on the machine time, which is equal
processing, and two time equations need to be to: Basic P (2 min) + Product A specific P
formulated: (1 min) + Product B specific P (1 mins) +
Product C specific P (2 mins) + Product D
• One equation for manual order entry, specific P (4 mins).
based on the labour time which is for
example equal to: Basic P (1 min) + In this case however, there is no reduction in
Product A specific P (1 min) + Product B complexity.
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JAMAR Vol. 8 · No. 2· 2010
Share of activity
Standard time
Product code
Cost in Dollars
Customer code
Salesperson
Order code
Order line
consumed
in mins
capacity
code
code
Etc.
…
150 1.50 0.0000031 1.10675 1110 246 444 3456 22
001 3.00 0.0000066 0.33600 1111 5432 444 3456 22
002 0.00 0 0 1111 5432 444 3456 22
… 1111 5432 444 3456 22
150 1.50 0.0000031 1.10675 1111 5432 444 3456 22
001 2.00 0.0000044 0.22400 1112 1660 444 3456 22
…
27
Certain resource groups are presented in each
order line, such as the entry of this order line. Other
groups are however more seldom used; for example
an order line may concern an article that needs
special packaging, and therefore needs time for this
activity, while most of the other order lines concern
an article with no special packaging.
20