Description of TDABC and Its Features
Question:
Discuss About The Conference On Engineering And Industrial?
Time-Driven Activity Based costing is an approach introduced after identifying the problems in the application of Activity Based Costing. It was noticed that the implementation of ABC was becoming difficult which resulted in the development of new approach named as TDABC. It was developed by Kaplan and Anderson which mainly focuses on measuring the time and reducing the complexity and cost of implementation. This report contains a description of TDABC and its features along with its comparison with traditional costing system and activity-based costing system. It also include an introduction about firm’s client which is PepsiCo Inc. and takes into accounting the suitability TDABC system to the client company including some benefits of the new approach.
PepsiCo, Inc. is an America based multinational Food and Beverages Corporation, having its headquarters in Purchase, New York. It deals in production, distribution and marketing of food and beverages. It is traded as NASDAQ: PEP and is a component of S&P 100 and S&P 500. PepsiCo is one of the leading company in food industry with net revenue of over $63 billion in year 2016. It has a global portfolio of diverse and beloved brands. The company manufactures dairy-based products, chips rice, cereals and snacks. Carbonated soft drinks, sports drinks and bottled water are included in its beverages. The food and beverage portfolio of the company include 22 brands and each of them make revenue more than $1 billion (Pepsico.com, 2018). It was formed in 1965.
The vision and mission of PepsiCo is to bring sustainability into everything the company do. It aims at making healthcare products, empowering its associates and communities in which it operates and protecting the planet. The main competitors of the company in food industry are ConAgra Foods, Inc. (CAG), Kraft Foods Group Inc. (KRFT), Kellogg Company (K), Mondelez International, Inc. (MDLZ) and Nestle S.A (NSRGY). The Coca-Cola Company is the closest competitor of PepsiCo in non-alcoholic beverage industry (Bailey and Realist, 2014).
Activity based costing was introduced with an objective to resolve the issue related to the inappropriate allocation of overhead. In ABC system, indirect costs are first assigned to activities and then to products and orders. It offers much more accurate cost which helps the managers to take better decisions. But despite of its merits, it had many problems such as the system was expensive, difficult to modify and implement and moreover, the system requires detailed surveying which takes a lot of time and is costly. The data used for making models were biased and expensive to store, process and report. All this resulted in the desertion of ABC by the companies and evolution of a new approach called as Time-Driven Activity Based Costing. This method provide companies with a practical option for ascertaining the cost of their processes and profitability of products, orders and consumers (Cwj24.cz, n.d.).
Comparison between TDABC, Traditional Costing System and Activity-Based Costing System
TDABC was developed by Kaplan and Anderson with an objective to resolve the issues or problems associated with ABC system. This approach is comparatively more simple and powerful. Generally, ABC system allocates the cost to activities and then to products, which makes the process time consuming and complex as it requires detail surveying of the employees. TDABC on the other side mainly concerns with the measurement of time required to perform an activity and it assigns the resource costs directly to the product. One more disadvantage of Activity based costing is that it can only show the average cost and require a detail study if the activity is split into two or more actions. All these resulted in making the system complex, which give a rise to the new Time-Driven activity based costing system (Sethi, Bogataj and Ros-McDonnell, 2012). It marketing the process simpler by removing the necessity of surveying and interviewing employees concerning with the assignment of cost to events before assigning them to cost objects. The main cost driver of this method is time and it uses time equation when the time required depends upon several factors. This method directly assign the cost to cost objects which only requires two set of estimates (Martin, n.d.). Following estimates are:
- Rate of capacity cost = cost of supplying the capacity / time of employees worked
- Capacity consumption estimate= unit time taken for performing each case of activity.
- Rate of cost driver: Capacity cost rate*Capacity consumption estimate
After this, cost is assigned to an individual consumer for which cost driver rate is applied to the customer service time, which is calculated as
Customer service time: (Capacity consumption estimate)*(number of time the activity is performed)
Unlike ABC’s two stage method, TDABC uses time equations for allocating the resource costs directly to products which results in the accurate time and cost estimates. According to Kaplan and Anderson, time equations are considered to be the heart of TDABC as they help in direct allocation of costs from the resource cost pool to products (Cmawebline.org, 2010).
- This new approach can work together with Enterprise Resource Planning and Customer Relationship management system.
- Heavy amount of transactions can be handled easily and that to with fast processing time by using ERP system.
- It uses simple time estimates and eliminate the need of subjective interviews and survey process (Prado-Prado and García-Arca, 2014).
- Variations and complexity in large number of business transactions are accurately accounted by TDABC.
- It provides an appropriate and correct understanding of the capacity by units of time.
- A successful implementation of ERP system is required to create TDABC system in order to analyse costs (Hope and Player, 2012).
It is that equation which measures the time required for performing an activity. TDABC easily integrates deviations in the time demand made by different transactions. It nullifies the assumption that all the orders are same and require the same amount of time to be processed. The model allows unit time estimates to differ as per the characteristics of activity. Moreover, the time equations are simple to implement as in many companies data is already stored on various characteristics like order, packaging through ERP system. These transaction specific data helps in the quick calculations of particular time demands of any order by applying a simple algorithm. The accuracy of the model can be judged from its ability to gather resource demands from various activities by simply adding more term to departmental time equation (Hansen, Mowen and Madison, 2010).
Suitability of TDABC system for PepsiCo Inc.
In TDABC, there is no need to survey each and every period, personnel of a particular department for making time estimates. The model simply allows all the activities to be integrated into one process with one equation. These time equations help the managers to simulate in future as they capture the key factors that create demands for process capacity, including the variations in process efficiencies, patterns of customer orders, product volume and mix and channel mix. Managers can use this model to conduct dynamic what-if analysis, business planning and to determine the level of employees required as per the customer demands (Mitchell, Nørreklit and Jakobsen, 2013).
TDABC and ABC (Gill, 2015), (Sandborn, 2012).
|
Basis |
Activity –based costing |
Time-driven Activity based costing |
|
Nature of drivers |
It takes into account the cost drivers for Assigning costs to product and services |
It considers time drivers for assigning costs |
|
Number of drivers |
ABC assumes average cost for every activity driver. |
It uses multiple factors for each activity driver. |
|
Extensiveness |
It is very much extensive and time consuming. |
Comparatively less extensive and focuses on saving the time by forming a time equation. |
|
Modification |
Difficult to modify and maintain according to the new requirements. |
Can be easily modify as and when required. |
|
Accuracy |
It fails to consider the specifications of activity, through which costs are influenced. |
It takes into account all the specifications of activity that influences cost. |
|
Usage of Capacity |
Due to the use of survey method, the cost of activities performed tend to be overestimated which results in inaccurate representation of capacity usage. |
It expresses the capacity in units of time that results in more accurate depiction of over and under capacity. |
|
Information aggregation |
ABC sums all the information in resource-to-activity matrix by columns. |
TDABC sums all the data in resource-to-matrix by rows. |
|
Traditional costing |
Time-driven ABC |
|
It applies costs to the products on the basis of a predetermined overhead rate. It uses a single cost driver such as labour hours and allocate costs on average basis to all the products. |
It directly applies the costs to the products by using a time equation. It consider all the factors at time of assigning the cost. |
|
This system is less accurate as it does not takes into account non-manufacturing expenses or does not determined which overhead cost affect which product. |
TDABC is more accurate as it determines all the elements and specifications of the activity at time of assigning the cost to products. |
|
The parameter used by this system is the volume of the resources used for the purpose of production, on the basis of which costs are assigned. |
The two parameters of this method are unit cost of resources used and time taken to perform an activity. |
|
Traditional costing system uses direct overheads such as direct labour hours for allocating the cost to products. |
Time-Driven activity based costing basically considers time drivers to allocate the cost. |
Time-Driven Activity Based Costing can proved to be very suitable for PepsiCo Inc. as applying this new system can provide many benefits to its managers. Such as:
- It provides managers with accurate strategic cost and profitability model which is inexpensive, fast and easy to build and maintain.
- Managers can now combine the large transaction data through ERP and customer relationship management systems (Namazi, 2016).
- Applying TDABC will provide management with a costing model which will be based on transactions specific of individual orders, suppliers and customers.
- The company can identify opportunities for managing the capacity and increasing process efficiencies by using the model.
- TDABC makes forecast related to resource demands which enable the company to prepare budget for the capacity required in order to manage the sales and production estimates in their strategic plans.
- It will be inexpensive and easy to update the model as per the changes in the process costs and efficiencies (Ozyurek and Dinç, 2014).
- The approach of cost and profitability management can be used by PepsiCo as it has complex business structure and large expenditure for people and capital.
- The company can use time equations to estimate the cost of a particular transaction by simply applying an algorithm and by adding additional terms to the equation, if required.
- With use of TDABC, PepsiCo is not required to survey all its employees for allocating the resource costs (Anti? and Georgijevski, 2010).
So overall, the application of TDABC in the business will be very beneficial for the company as it has complexity in its products, customers, having different channels of distribution, various segments and large business transactions. With help of TDABC, company can easily and quickly allocate the resource costs to the products by using a time equation.
Conclusion
It can be concluded from the above report that time-driven ABC system is much more appropriate and easy to apply method as compare to activity based costing and traditional costing method. Moreover, a company like a PepsiCo Inc., which have several segments, distribution channels, complex organization structure and large number of business transactions can apply TDABC in order to estimate the human resource management cost accurately and timely. This new approach is suitable to PepsiCo as it will eliminate the need of conducting surveys of all employees in order to allocate costs and saves time also. So, it can be concluded that, by applying TDABC management will be able to take better decisions.
References
Bailey, S. and Realist, M. (2014). PepsiCo: A company overview. [Online] Finance.yahoo.com. Available at: https://finance.yahoo.com/news/pepsico-company-overview-203956177.html [Accessed 23 Jan. 2018].
Cmawebline.org. (2010). Time-Driven Activity-Based Costing (TDABC): An Initial Appraisal through a Longitudinal Case Study. [Online] Available at: https://www.cmawebline.org/images/stories/JAMAR_2010_Summer/JAMARv8.2-TDABC.pdf [Accessed 23 Jan. 2018].
Cwj24.cz. (n.d.). TIME-DRIVEN ACTIVITY-BASED COSTING. [Online] Available at: https://www.cwj24.cz/doc/Time-Driven-ABC.pdf [Accessed 23 Jan. 2018].
Gill, S. (2015). Cost and Management Accounting: Fundamentals and its Applications. 1st ed. New Delhi: Vikas Publishing House.
Hansen, D.R., Mowen, M.M. and Madison, T., 2010. Cornerstones of cost accounting. Issues in Accounting Education, 25(4), pp.790-791.
Hope, J. and Player, S., 2012. Beyond performance management: Why, when, and how to use 40 tools and best practices for superior business performance. Harvard Business Press.
Martin, J. (n.d.). The Innovation of Time-driven ABC. [Online] Maaw.info. Available at: https://maaw.info/ArticleSummaries/ArtSumKaplanAnderson2007.htm [Accessed 23 Jan. 2018].
Mitchell, F., Nørreklit, H. and Jakobsen, M., 2013. The Routledge companion to cost management. Routledge.
Namazi, M. (2016). Time-driven activity-based costing: Theory, applications and limitations. [Online] Ijms.ut.ac.ir. Available at: https://ijms.ut.ac.ir/article_57481_793361023886e0c6698746124227687b.pdf [Accessed 23 Jan. 2018].
Ozyurek, H. and Dinç, Y., 2014. Time-Driven Activity Based Costing. International Journal of Business and Management Studies, 6(1), pp.97-117.
Pepsico.com. (2018). About – PepsiCo. [Online] Available at: https://www.pepsico.com/About [Accessed 23 Jan. 2018].
Prado-Prado, J.C. and García-Arca, J., 2014. Annals of Industrial Engineering 2012. Springer.
Sandborn, P.A., 2012. Cost analysis of electronic systems (Vol. 1). World Scientific.
Sethi, S.P., Bogataj, M. and Ros-McDonnell, L. eds., 2012. Industrial Engineering: Innovative Networks: 5th International Conference on Industrial Engineering and Industrial Management” CIO 2011″, Cartagena, Spain, September 2011, Proceedings. Springer Science & Business Media.
Tierney, N.W., 2017. Value Management in Healthcare: How to Establish a Value Management Office to Support Value-Based Outcomes in Healthcare. Taylor & Francis.
Anti?, L. and Georgijevski, M., 2010. Time-driven activity based costing. ECONOMIC, p.497.
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