Time Driven Abc

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TOOL KIT Many companies abandoned activity-based costing because it did not capture the complexity of their operations, took too long to implement, and was too expensive to build and maintain. Here’s a way around those problems.

Time-Driven ActivityBased Costing
by Robert S. Kaplan and Steven R. Anderson
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Many companies abandoned activity-based costing because it did not capture the complexity of their operations, took too long to implement, and was too expensive to build and maintain. Here’s a way around those problems.

TOOL KIT

Time-DrivenActivityBased Costing
by Robert S. Kaplan and Steven R. Anderson

COPYRIGHT © 2004 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.

In the classroom, activity-based costing looks like a great way to manage a company’s limited resources. But many managers who have tried to implement ABC in their organizations on any significant scale have abandoned the attempt in the face of risingcosts and employee irritation. They should try again, because the new approach we lay out in the following pages sidesteps the difficulties traditionally associated with large-scale ABC implementation by relying on informed managerial estimates rather than on employee surveys. It also provides managers with a far more flexible cost model to capture the complexity of their operations.

ABC MadeDifficult
The roots of the problem with ABC lie in the way people traditionally construct ABC models. Assume you are analyzing a customer service department that performs three activities: processing orders, handling inquiries, and performing credit checks. The department’s total expenses (the cost of the personnel, man-

agement, IT, telecommunications, and other fixed resources) amount to $560,000. Theactual (or estimated) quarterly quantities of work in the three activities are 49,000 orders, 1,400 inquiries, and 2,500 credit checks. To build a traditional ABC model for this department, you would survey employees to estimate the percentage of time they spend (or expect to spend) on the three activities and then assign the department’s resource expenses according to the average percentages youget from the survey. Let’s say employees report that they spend (or expect to spend) about 70% of their time on customer orders, 10% on inquiries or complaints, and 20% on credit checks. This implies, under ABC, that each order consumes $8 of resource expense, each inquiry $40, and each credit check $44.80, as shown in the exhibit “Doing ABC the Traditional Way.” Armed with these figures, known asthe cost-driver rates, managers can assign the costs of the department’s resources to the customers and products that use its services. This approach works well in the limited set-

harvard business review • november 2004

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This article is made available to you with compliments of Acorn Systems, Inc. Further posting, copying, or distributing is a copyright infringement. To orderadditional copies, click here.

Time-Driven Activity-Based Costing •• •T OOL K IT

COPYRIGHT © 2004 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.

Robert S. Kaplan (rkaplan@hbs.edu) is the Marvin Bower Professor of Leadership Development at Harvard Business School in Boston. Steven R. Anderson (sanderson@acornsys.com) is the founder and chairman of Acorn Systems, asoftware and consulting firm headquartered in Houston. Kaplan serves on the board of Acorn Systems.

ting in which it was initially applied, typically a single department, plant, or location. Difficulties arise, however, when you try to roll this approach out on a large scale for use on an ongoing basis. In one large bank’s brokerage operation, the ABC data-gathering process required 70,000...