There are number of elements which creates unnecessary burden for the business units such as providing quality of goods and services at lower cost to the consumers. These elements includes high cost related to information, high demand in context of services related to digital, economic slowdown, etc.. It becomes necessary for the management of the organization to understand the aspects related to costs and other participation of costs in the organization for evaluating the role of these elements in the organization and use these elements in the favor of the organization (Kaplan & Anderson, 2003).
Cost management introduces various techniques, and one of the most reliable techniques of the cost management is the Time-Driven Activity-Based Costing (TDABC). TDABC is considered as important technique of the cost management because it helps the business organization in the development of the exact cost information related to various activities performed in the business unit. TDABC is not a new technique but it is the improved version of the original model of the costing that is Activity based costing (ABC). Business organizations required this improved version because of the shortcomings of the original ABC model. It becomes difficult for the management to apply this traditional model of costing in their organizations as it involves the high cost in context of interviews and surveys of the people.
Implementation of the traditional model of ABC is challenging for the organization because of the complication level of this model. As stated above, TDABC is the improved version of the original ABC model, and this version is based on the two factors that are unit cost related to capacity of supplying and required time for conducting any activity or operation (Basuki & Riediensyaf, 2014).
Structure of this report includes the discussion on suitability of TDABC on private organization operated in Australia. This report is referred to the client named BHP Billiton Plc. and it includes the brief information about the client, introduction of TDABC and its features, reliability of TDABC for client. After all this discussion, report is concluded with brief conclusion which summarizes all the important points.
BHP Billiton holds the position of top resource company across the globe, which is involved in mining and handling of minerals, oil and gas. BHP employed 6000 workers and employees mainly in countries like Australia and USA. Company sells its products and services across the globe. Melbourne, Australia is the place where BHP established its main headquarter. This company opts for Dual Listed Company structure which involves two parent companies that are BHP Billiton Limited and BHP Billiton Plc. (BHP, n.d.).
Generally, it is expected from the management of the business organizations that they understand the cost behavior and manage the business accordingly. However, management can only implement the cost model in effective manner if such model is easy to understand and if such model shows the changes occurred in the business on time. Traditionally, business organizations used the original activity-based costing (OABC) for understanding the cost behavior of the firm, but because of the shortcomings of this model organization required new model. Latter, improved version of OABC is introduced by the experts and this new version eliminates all the shortcomings of the OABC as it is completely different from the OABC. However, it must be noted that OABC is considered as strong model of costing which is different from products and services, but TDABC shows more differentiation and complexity in context of products and services offered by company.
TDABC is the model which is simple in nature and easy to understand. It is easy for management to understand and implement this model because it facilitates the high quality information by eliminating the issues created by OABC (Stout & Propi, 2011).
Presently, this model is considered as effective and efficient cost model for business organization because it is possible to change the parameters of this model with changing business environment. Two elements are considered by the TDABC, and these two elements are unit cost related to capacity of supplying and required time for conducting any activity or operation. Both the parameters are discussed in detail:
Capacity cost- TDABC initiates its working by recognizing various classes of resources related to performance of activities in the organization. Measuring of capacity related to resources is done on the basis of time availability and time-driven approach. This parameter is calculated by using the formula stated below:
Capacity cost rate- Cost of capacity supplied/ practical capacity of resources supplied.
Estimation of Time- in this organization determines the time required for performing any particular activity, and there is no need to calculate the exact time, organization can determine the close estimation of time.
As define, TDABC is the new and better model in comparison of OABC, and some of the advantages of this model are stated below:
This section of the report is divided into two parts; first part defines the difference between the TDABC and original model of ABC. On the other hand, second part of this section defines the difference between TDABC and other traditional costing techniques.
Original model of ABC is the costing method which provides various facilities to the business organization at initial stage, but after sometime it is noted that this model is not suitable for large scale operations. OABC is the model which provides reliable option to the management of the organization by distributing the costs to the consumers and products related to the services of departments. This model also possesses some other disadvantages such as it is an expensive model and complex in nature. Elimination of OABC is not an option for the organizations because concept of this model is useful and strong, and it provides huge potential for companies in context of large scale operations. Later, simple approach of this model is developed by the experts and this approach is known as the time-driven ABC. Difference between the OABC and TDABC is stated below:
|
TDABC |
ABC |
|
It is easy to maintain and update this system, because maintaining and installation of this model is not costly. |
OABC model is an expensive model which involves high maintenance cost. |
|
Management applied and understands this model easily. |
This model is complex in nature. |
|
Duration cost drivers is the parameter which is used by the TDABC. |
Transaction cost drivers is the method which is used by OABC (Hayden, n.d.). |
Traditional costing techniques used the application of indirect cost on products and this cost is based on the preset overhead rate. In this overhead cost is considered on the basis of single group which directly relates with indirect cost. It is suitable in the organizations where indirect cost is low in comparison of direct costs. Various parameters are used by these methods such as identification of indirect cost, estimation of that cost for specific time, selection of cost driver, estimation of cost driver amount, etc. (Accounting Tools, 2015).
TDABC is the model which does not consider the direct or indirect cost, but is estimates the capacity of the department or process of the organization. Later, cost is allocated in context of resource capacity over the cost object, and this object is mainly relied on the required time for performing any activity or transaction in the organization. If work in these departments or processes reduced because of any reason, then also TDABC is effective because it make the estimation related to the quantity of the resources released. This model considered various elements of any activity or process such as capacity time requirements, unit cost, etc. difference between the two is summarized below (Johnson, 2018).
|
Traditional methods of costing |
TDABC |
|
Traditional methods of costing use the indirect cost as variable. |
TDABC considered the capacity of particular department and process in the organization. |
|
Different parameters are used by the traditional method of costing for the purpose of calculating the cost. |
This model only determine two parameters for the purpose of calculating the cost. |
|
These techniques can only be used in case when indirect cost is low in comparison of the direct cost. |
TDABC suitable in every situation (Kaplan & Anderson, 2004) |
In 2017, BHP Billiton Plc. issued its annual report and operation management section of this report states various issues faced by company while operating its business. As per this section of annual report, whole resource industry feels the pressure related to cost and prices related to products are calculated by considering the commodity markets across the globe. It is not possible for organization to eliminate this pressure of cost by increasing the price of the product which ultimately results in adverse impact on the organization productivity. Various efforts are made by the organization for decreasing their cost, but because of the direct connection between the costs inputs made it impossible for organization to decrease their cost and required time. It must be noted that cost related issues affect the operating margins of the company (BHP, 2017).
It is possible for organization to solve these issues by adopting the costing technique named as time-driven activity-based costing, as it helps the organization by improving the capacity of resources group and by allocating the resources in adequate manner. Some of the usage of TDABC in BHP Billiton is stated below:
BHP Billiton faces various issues while using the other costing techniques such as overestimation of cost as it decrease the capacity usage of the resources. TDABC model is suitable for the BHP as it helps the organization in increasing its productivity.
Conclusion:
This report highlights various significant aspects of the TDABC model in present environment of the business and it also states the suitability of this model in the private organizations like BHP Billiton Plc. it helps the organization in estimating the cost allocated to each department and resources group of the organization, and it also help the management in conducting their operations in planned manner. TDABC shows more differentiation and complexity in context of products and services offered by company.
TDABC is the model which is simple in nature and easy to understand. It is easy for management to understand and implement this model because it facilitates the high quality information by eliminating the issues created by OABC.
References:
Accounting Tools, (2015). Traditional Costing. Retrieved on 19th January 2018 from: https://www.accountingtools.com/articles/what-is-traditional-costing.html.
Basuki, B. & Riediensyaf, M. (2014). The Application of Time-Driven Activity-Based Costing In the Hospitality Industry: An Exploratory Case Study. JAMAR, Volume 12(1).
BHP, (2017). BHP Annual report 2017. Retrieved on 19th January 2018 from: https://www.bhp.com/-/media/documents/investors/annual-reports/2017/bhpannualreport2017.pdf.
BHP. About Us. Retrieved on 19th January 2018 from: https://www.bhp.com/our-approach/our-company/about-us.
Garvais, M. Levant, Y. & Ducrocq, C. (2010). Time-Driven Activity-Based Costing (TDABC): An Initial Appraisal through a Longitudinal Case Study. JAMAR, Volume 8(2).
Hayden, A. Activity-Based vs. Traditional Costing. Retrieved on 19th January 2018 from: https://quickbooks.intuit.com/r/pricing-strategy/activity-based-vs-traditional-costing/.
Johnson, R. (2018). Traditional Costing Vs. Activity-Based Costing. Retrieved on 19th January 2018 from: https://smallbusiness.chron.com/traditional-costing-vs-activitybased-costing-33724.html.
Kaplan R. & Anderson, S. (2004). Time-Driven Activity-Based Costing. Retrieved on 19th January 2018 from: https://hbr.org/2004/11/time-driven-activity-based-costing.
Kaplan, R. & Anderson, S. (2003). Time-Driven Activity-Based Costing. Retrieved on 19th January 2018 from: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=485443.
Stout, D. & Propi, J. (2011). Implementing Time-Driven Activity-Based Costing at a Medium-Sized Electronics Company, Management Account Quarterly, Volume 12(3).
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