You are required to prepare a report to comment on the suitability of the TDABC for a company of your choice (your firm’s client). The report should cover the followings:
A description of your firm’s client
A description of the TDABC and its features
In what ways TDABC is different from Activity-Based Costing and traditional costing systems
A discussion on whether the TDABC is suitable to your firm’s client
Managerial accounting is a process of measuring, interpretation, investigating, determining and communicating the information for the pursuit of organizational objectives and goals. It is essential for managers in the companies to keep the record of the resources that are required to accomplish the order and processes. Time-Driven Activity-based costing is an improved method of the Activity-based costing and the method is introduced by Kaplan and Anderson to save the time and the amount of the companies who implemented ABC. The report will discuss the concept of the Time-Driven Activity-based costing and its features.
The report reflects that the suitability of this method for the company. The company that has been selected for the analysis is Johnson and Johnson, a leading manufacturing company. The report also includes the difference between TDABC (Time-driven Activity-based costing) and ABC (Activity-based costing) and traditional costing system.
Johnson & Johnson is an American multinational that came into the existence in the year 1886 with its headquarters in New Brunswick, New Jersey. J&J produces medical devices, consumer, and pharmaceutical goods and it is having more than 125,000 employees in 60 countries. In the year 2015, the company had the sales of $70.1 billion (Johnson & Johnson, 2017). The company innovation team search for the positive effect on the health of the human beings with the use of the innovative products. J&J provide the opportunities to the entrepreneurs to live their dream of creating healthcare solutions to enhance the lives of the people globally. The company is also dealing with the innovators so that they can exchange the ideas and resources that lead to the success of the company (Johnson & Johnson, 2017).
The company has faith in caring the world, individual at a time, motivates and unites the employees of the company. The products offered by the company are:-
Vision slogan of the company is ‘Be yourself, change the world’.
The vision of the company is for every member of the organization to make use of their unique backgrounds and experiences combinable to spark the solutions that lead to the healthier and better world (Johnson & Johnson, 2016).
The company believes in caring the world and to help the people everywhere across the world to live happier, longer and healthier lives. The mission of the business is to bring diversity to the organization business practice. The company believes that they will spread the culture of belonging where minds and hearts combine together to unleash the potential of a talented mix of individuals within the J&J (Johnson & Johnson, 2016).
There are some of the areas where the company is focusing that help the company in growth and prosperity for the future in the context of Cerdo and strategic principles (Johnson & Johnson, 2017).
The code of business conduct of J & J is to ensure that they are able to perform the business activity in high standard and also believes in meeting the obligation related to the stakeholders (Johnson & Johnson, 2017).
Time-driven Activity-based costing method is the accounting method that is new or advances method of ABC (activity-based costing) and this method is a driving on a base time. TDABC method saves the time and money of the manufacturing and the service companies. This method is generally used by the large organization with the complex business transaction as this method can accurately account the compound business transactions of different departments. This system removes the requirement of the surveys and interviews that is essential for the analyses of resource pools because this method includes direct observation method (Gervais, Levant, and Ducrocq, 2010).
The companies find this method easier to implement within the organization as compared to the traditional ABC model. Time-driven ABC needs the prediction of dual parameters which include the unit cost of supplying capacity and the time required to execute a transaction or an activity. This is one of the most accurate methods that represent the under and over volume by expressing capacity in units of time due to this most of the companies are making use of this system. The managers of the companies find it easy to maintain and update with the use of the time equations (Ozyurek, and Dinç, 2014).
Time equations in TDABC are an illustrative of the services that are offered by the department of the company. This equation is useful for this method to get the accurate prediction of the resources required to fulfill the business requirements that are essential for the budgeting purpose. The use of the time equation is supported by the today’s ERP system due to which the managers of the company can simply update the capacity cost rate with the change in the operational conditions. The implementation of the ERP is increasing in the company which is indirectly helping the TDABC method (Ozyurek, and Dinç, 2014). ERP system stores the data that is essential to calculate the time needed to accomplish the order or process within the organization.
TDABC is new ABC method that came into the existence after the improvement in the ABC. The ABC method was introduced to resolve the problems in the traditional accounting system. There is huge difference between the TDABC and ABC and traditional costing system which is clear from the tables given below:-
|
Activity-based costing |
Time-driven Activity-based costing |
|
The level of accuracy is less in Activity-based costing as compared to the TDABC. |
This model is able to provide the high accuracy of the large manufacturing and service companies. |
|
This method assigns the resources initially before assigning it to the object which makes this method complex as compared to the TDABC (Browning, 2017). |
This method directly assigns the cost to the object that can be customer, transactions, processes, and order types. |
|
In ABC, there is involvement of the complexity and the need for the data processing. |
This method removes the requirement of the data processing as this method believes in direct observation along with this the method can handle the complex business activities of the organization (Ayvaz, and Pehlivanl, 2011). |
|
Traditional costing system |
Time-driven Activity-based costing |
|
The level of accuracy is less in the traditional costing system due to which there was the introduction of the ABC that provide the accurate volume of costs but not more than the TDABC. The level of accuracy is more in TDABC than ABC and traditional costing method (Medeiros, Santana, and Guimarães, 2017). |
The level of accuracy is high in the TDABC that is essential to measure the cost that is associated with the cost object that leads to the better and effective decision making while identifying the pricing or decreasing the operational costs. |
|
This method identifies the overhead cost by dividing cost across the products according to the predicted ratio of resources which include machine time or space occupied. |
This method can effectively allocate overhead costs to product and services by determining the resource consumption while manufacturing the products and services. |
TDABC is suitable for the manufacturing company Johnson and Johnson for enhancing the productivity in less time with low cost. The company is having the compound business activities in the different department which is essential to be maintained and it is possible with the use of the TDABC method.
The implementation of the TDABC model will help the company in identifying their operational cost to predict the required resources to fulfill the upcoming requirement after evaluating how to enhance the effectiveness of processes and modify the product pricing, product, and customer mix to enhance the profitability. Therefore, the implementation of the TDABC will enhance the effectiveness of Johnson and Johnson (Adioti, and Valverde, 2013).
In TDABC model, time is used as a volume of resource consumption by events that have been triggered by the cost objects to create outputs. These events of the company might fluctuate according to the product or service request, the type of customer, location of delivery and many other aspects. Though, with the use of the TDABC company will get to know the accurate volume of the resource consumption. Johnson and Johnson can implement this TDABC method which helps the company in getting the accurate volume of the resources required.
TDABC is easier to implement, maintain and organize in the organization as compared to the ABC. So, Johnson and Johnson don’t have to spend more time on implementing the method as it is easy to maintain, implement and organize.
TDABC method removes the time of interviews and surveys and believes in the direct observation which saves the time of the company and they can spend this time in other activities to enhance the productivity (Adioti, and Valverde, 2013).
Conclusion
TDABC (Time-Driven Activity-based costing) is an effective method for the service and the manufacturing companies. Large manufacturing companies can make use of this approach to handle the compound operations of their business. The report shows how this approach is suitable for the Johnson and Johnson manufacturing company. The implementation of this approach in the company will not only save the time and money of the company but will help the manager by providing the accurate volume of resources required to meet the objective. The companies don’t have to spend the additional time in processing the data as this method eliminates the data processor with the use of ERP systems.
References
Adioti, A.A. and Valverde, R., 2013. Time-driven activity based costing for the improvement of it service operations. International Journal of Business and Management, 9(1), p.109.
Ayvaz, E. and Pehlivanl, D., 2011. The use of time driven activity based costing and analytic hierarchy process method in the balanced scorecard implementation. International Journal of Business and Management, 6(3), p.146.
Browning, J.P., 2017, What Types of Businesses Do Activity-Based Costing?, Accessed on; 18th January 2018, Accessed from https://bizfluent.com/info-12105073-types-businesses-activitybased-costing.html
Gervais, M., Levant, Y. and Ducrocq, C., 2010. Time-driven activity-based costing (TDABC): An initial appraisal through a longitudinal case study. Journal of Applied Management Accounting Research, 8(2), p.1.
Johnson & Johnson, 2016, Diversity & Inclusion, Accessed on; 18th January 2018, Accessed from https://www.jnj.com/about-jnj/diversity
Johnson & Johnson, 2017, About Johnson & Johnson, Accessed on; 18th January 2018, Accessed from https://www.jnj.com/about-jnj
Johnson & Johnson, 2017, Code of Business Conduct, Accessed on; 18th January 2018, Accessed from https://www.jnj.com/code-of-business-conduct
Johnson & Johnson, 2017, Consumer Products, Accessed on; 18th January 2018, Accessed from https://www.jnj.com/healthcare-products/consumer#health-healing-products
Johnson & Johnson, 2017, Medical Devices, Accessed on; 18th January 2018, Accessed from https://www.jnj.com/healthcare-products/medical-devices
Johnson & Johnson, 2017, Our Commitment to Innovation, Accessed on; 18th January 2018, Accessed from https://www.jnj.com/innovation-at-jnj
Johnson & Johnson, 2017, Our Credo, Accessed on; 18th January 2018, Accessed from https://www.jnj.com/about-jnj/jnj-credo
Johnson & Johnson, 2017, Our Story, Accessed on; 18th January 2018, Accessed from https://ourstory.jnj.com/our-beginning#experience-our-beginning-ch-3-9
Johnson & Johnson, 2017, Products, Accessed on; 18th January 2018, Accessed from https://www.jnj.com/healthcare-products
Medeiros, H.D.S., Santana, A.F.B. and Guimarães, L.D.S., 2017. The use of costing methods in lean manufacturing industries: a literature review. Gestão & Produção, (AHEAD), pp.0-0.
Monroy, C.R., Nasiri, A. and Peláez, M.Á., 2014. Activity Based Costing, Time-Driven Activity Based Costing and Lean Accounting: Differences among three accounting systems’ approach to manufacturing. In Annals of Industrial Engineering 2012 (pp. 11-17). Springer London.
Ozyurek, H. and Dinç, Y., 2014. Time-Driven Activity Based Costing. International Journal of Business and Management Studies, 6(1), pp.97-117
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