Activity-based costing (ABC) has become popular in business writing and management circles. (An example of an activity would process customer complaints.) However, calculating baselines for activities, developing the model, and retesting the model once it is implemented are time-consuming and costly. Kaplan and Anderson developed improvements in the process through what they call time-driven ABC. Time-driven ABC decreases the amount of data needed, and only requires estimates of two things: (1) The practical capacity of committed resources and their cost, and (2) Unit times for performing transactional activities. (Time-Driven Activity-Based Costing)Key concepts include:Building an accurate time-based algorithm in one facility will typically serve as a template that can be easily applied and customized to other plants, or even other companies in an industry.Time-driven ABC requires less time and resources to implement. At one company cited, it took two people two days per month to load, calculate, validate, and report findings, compared to the ten-person team spending over three weeks to maintain the previous (traditional ABC) model.The traditional ABC model has been difficult for many organizations to implement because of the high costs incurred to interview and survey people for the initial ABC model, the use of subjective and costly-to-validate time allocations and the difficulty of maintaining and updating the model as (i) processes and resource spending change(ii) new activities are added, and (iii) Increases occur in the diversity and complexity of individual orders, channels, and customers. (Time-Driven Activity-Based Costing)Time-driven ABC requires estimates of only two parameters: (1) The unit cost of supplying capacity and (2) The time required to perform a transaction or an activity. A time-driven ABC model:• Can be estimated and installed quickly.• Is easily updated to reflect changes in processes, order variety, and resource costs.• Can be data fed from transactional ERP and CRM systems.• Can be validated by direct observation of the model’s estimates of unit times.• Can scale easily to handle millions of transactions while still delivering fast processing times and real-time reporting. • Explicitly incorporates resource capacity and highlights unused resource capacity for management action. • Exploits time equations that incorporate variation in orders and customer behavior without expanding model complexity. (Robert S. Kaplan) d): Introduction of ABC:Activity-based costing (ABC) is an approach to costing and monitoring of activities which involves identifying the activities that are responsible for the generation of cost. The essential principles of ABC are that:• Activities (not a product) generate costs.• Products consume activities.An activity is a process which adds values and consumes resources.A cost driver is any factor which causes a change in the cost of an activity.Examples of cost drivers:The following are the examples of cost drivers.Activity Cost DriverMaterial procurement Number of purchase ordersMaterial handling Number of movementsQuality Control Number of inspectionsEngineering services Number of change ordersMaintenance Number of break-downsLine Set-up Number of set-upsThe Mechanics of ABCThe mechanics of operating an ABC system are similar to a traditional absorption costing, but the result achieved can be very different.The application of ABC involves a set procedure:• The recording of costs, as normal• Allocation of overheads to form cost pools associated with each ‘value adding’ activity.A cost pool results from the pooling or accumulation of overhead cost which relates to a specific activity.For example, all the overheads associated with the inspection process would together form a cost pool:Steps Involved in ABC:Step 1- Identify activities that consume resources and incur an overhead cost.Step 2- Allocate overhead cost to the activities that incur them. In this way, each identified activity becomes a cost pool for overhead cost. It is important that overhead costs should be directly allocated to a cost pool. There should not be any arbitrary apportionment of overhead costs.Step 3- Determine the cost driver for each activity or cost pool.Step 4- Collect data about an actual activity or cost pool.Step 5- Calculate the overhead cost of products or services. This is done by calculating an overhead cost per unit of the cost driver (a cost per unit of activity). Overhead cost is then charged to products or services on the basis of activities used for each product or service.Advantages of ABC:(a) The perceived benefit of introducing an activity-based costing system is that the unit cost should more accurately reflect the activities performed and therefore the resources used. (b) An improved more accurate product cost may enable a company to concentrate on a more profitable mix of products or customers. ABC has been effectively used in identifying customers who are unprofitable to produce.(c) It helps identify those activities that add more to a value than cost so that the non-value-added items can be appraised effectively with a view to elimination. As such it forces managers and supervisors to consider the drivers that affect cost and what these drivers contribute to the final product.(d) By focusing attention on cost drivers’ manager will have a better understanding of the costs of production and the cost of the activities performed by the company.Conclusion and RecommendationABC should not be the only tool that provides companies with the competitive edge. ABC cannot solve all the problems in your company. ABC is just one of the tools which complement and enhance another management tool such as Six Sigma, Business Process Re-engineering, and Total Quality Management. It is one of the tools which help managers to formulate and make a strategic decision. Companies need to ensure that whichever management tools it uses; it must complement and supplement each other so that it can reap maximum benefit.In implementing ABC to achieve the company’s goal, it must have a practical mindset. ABC system is just “a machine” it does not think for you, perform work for you or resolve problems by itself.