TDABC, as the authors abbreviate their new approach to costing, is a bridge between ABC and ‘Balanced Scorecard’, says the preface. Balanced Scorecard, as you may know, describes a model of value creation, by measuring the customer value proposition and by linking critical processes and intangible assets to customer and shareholder value creation.

And ABC, for starters, is a model of cost, which provides managers with ‘vital cost-curve information’ to help them make better decisions about ‘process improvements, order acceptance and rejection, pricing, and customer relationships’.

Yet, ABC has faced low adoption rate, owing to the expense and complexity involved. “For example, a company using 150 activities in its enterprise ABC model, applying the costs to 6 lakh cost objects (products, SKUs, and customers), and running the model monthly for two years requires data estimates, calculations, and storage for more than 2 billion items.”

TDABC is a cheaper and far more powerful approach, aver the authors. The new model ‘eliminates the need to interview employees for allocating resource costs to activities before driving them down to cost objects (orders, products, and customers)’. Instead, the model ‘assigns resource costs directly to the cost objects’ by making only two sets of estimates — capacity cost rate, and demand for resource capacity that each cost object requires.

In the first measure, capacity is ‘the time available from the employees actually performing the work’, and cost is the total cost of all resources (such as personnel, supervision, occupancy, equipment and technology) supplied to the department or process. Total cost divided by capacity gives you the rate, which the second measure uses ‘to drive departmental resource costs to cost objects’.

The new approach does not require the simplifying assumption that all orders or transactions are the same. TDABC allows the time estimate ‘to vary on the basis of the specific demands by particular orders, such as manual or automated orders, expedited orders, international orders, orders for fragile or hazardous goods, or orders from a new customer without an existing credit record.’

Kaplan and Anderson choose time as the primary cost driver of TDABC “since most resources, such as personnel and equipment, have capacities that can be readily measured by the amount of time they are available to perform work.”

A chapter on ‘fast-track profit modelling’ pushes the limits of TDABC. “By using such a model during the due-diligence process, a prospective buyer can identify where profit opportunities exist, how they can be captured, their cost and impact, and whether the organisation has the capacity to execute.”

Time-driven benchmarks can be relevant to many applications, say the authors. One of the examples in the book is about a bank with 160 branches. The bank discovered that taking deposits was a high-cost process, “representing 28 per cent of all maintenance costs. The TDABC model revealed which branches were more efficient for this key process…”

A book that can trigger changes in traditional ‘cost’ thinking.

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