Dsicuss about the Customer Profitability Analysis With Time-Driven.
TPG Telecom is a limited liability company in Australia that provides networking and telecommunication services to their customers. Their clients and customer have assisted them to provide fast, cost-effective, suitable and secure communication services through their feedback and suggestions. TPG offers various and distinct networking services to governmental bodies, enterprises, individual users, and the wholesalers. A client who has been investigating the budgeting of the company wants to apply TDABC costing system in his budgeting. His CEO has recommended it because he understood its importance from a seminar that he had attended some time back. I am supposed to determine whether the system will be suitable for our company’s budgeting. The company’s budgeting is crucial because it can help boost the profits at minimal costs.
I have been employed by the TPG telecom limited company in Australia as a graduate consultant. One of our clients is evaluating our budgeting system, and his CEO attended a meeting that intended to educate them on the suitability of TDABC (Time-Driven Activity-based Costing) on private companies and wants to access whether TDABC is suitable for TPG telecom ltd company. My manager requires me to prepare and write a report for the client to determine whether TDABC is ideal for the company or not. My report will cover a brief description of the TDABC’s client, a vivid TDABC description, and its characteristics, and its contrast from the earlier costing systems and activity-based costing systems. I will research on several companies that have implemented TDABC and determine whether its operations have been successful or not. I will discuss the importance and the problems associated with TDABC and then based on the discussion; I will conclude whether TDABC is appropriate for the client to use in his budgeting or not. If the system is appropriate for the company’s budgeting, then the company will follow the correct methodology to implement it. If the system is not necessary, then the company will discard it, and the client will have to rely on other methods to do his budgeting.
The TPG Telecom’s client name is Jonathan Kiplangat Agarwal. He is from Canberra, the capital city of Australia. He has masters in Managerial accounting and works with the company in budgeting and accounting field. He wants to evaluate our budgeting system, and he wants to ty whether using the Time-Driven Activity-Based costing will work well with his budgeting. His CEO wants him to use the TDABC because he recently attended a seminar that educated them on the importance of using the TDABC system for budgeting. My manager wants me to prepare a report for the client to determine whether the using TDABC is suitable for evaluating our budgeting system or not. The aim of employing the TDABC will ascertain whether the change in the budgeting system will increase the profitability. The budgeting will also determine whether the costs of production of the company’s goods and the value they gain from sales bring any reasonable profits or not.
The TDABC was first implemented by Acorn in 1997, applied it to his clients, and several business enterprises. Acorn discovered that TDABC could be used more broadly than he had thought. He did a case study and implemented the model in more companies as well as the midsize companies (Kaplan and Anderson 2007). TDABC measures the profitability of commodities at an individual level. It helps companies determine the unprofitability of their customers and determines the value of resources spent in keeping the unprofitable customer-business relationships. The means of measuring the profitability of customers gives a connection between the satisfaction of customers and the enhancement of the financial performance. It also records and measures the occurrences, the extent of the unprofitable customer relationships, and the value of losses they cause. This track of good records helps the business enterprises to focus on managing and keeping profitable customer relationships. Acorn discovered that if in business enterprises implemented TDABC, it gives them better means of cost-effectiveness and increases their profitability as well as giving them support to help them produce better quality products. TDABC considers the time and costs drivers to determine the cost of products. Time affects the prices a lot, for instance, in the labor sector. The amount of time laborers are given to complete their work determines a lot the value of their production. If they have very little time to work with, they are likely to produce lower quality products. Several factors are considered for every driver of cost determinant. It examines the features of the activities that play a role in the determination of the products’ prices.
TDABC is different from the conventional costing systems and the Activity-based costing (ABC) systems in several ways. The ABC is the process of allocating the costs of goods and services, duties, goals, and significant projects to the required resources. It involves determining the actions that should be taken by those tasks and the acquisition of the resources that will be used up by these projects (Levant and Zimnovitch 2013). ABC allocates the overhead costs the percentage of the amount of the funds they will use. The ABC is different from the TDABC since it assigns the value of goods and services by relating them to their cost of production whereas TDABC considers the time and cost drivers to determine the price of products. ABC considers only a single factor in the determination of the value of goods whereas TDABC considers several factors for every driver of cost determinant (Oleskow, Fertsch and Golinska 2009). The traditional costing systems allocate the factory’s overhead costs to the products depending on the value of the resources used in the production. The overhead costs are applied depending on the amount of the resources used in the output. The primary disadvantage of the traditional costing system is that the overhead costs could go higher than the discrepancies in resource allocation. This difference means that if the value of resources changes by a small range, then there is a massive deviation in the overhead costs.
The ABC and the traditional costing systems estimate the costs of sales and the profit margin separately for each product, unlike the TDABC which determines the specific commodities which can earn a profit. It could be difficult to determine the profitable products when the costs estimates are not precise (Szychta 2010). The traditional costing systems could provide distorted prices of goods and services, especially when there is a mismatch between the cost of activities and that of the resources. This mismatch in prices of commodities is different with the TDABC in that it ensures an apparent record of the events and the cost of the products. There are sporadic cases of distorted information. The TDABC was implemented to surmount the ABC’s and the traditional costing systems’ shortcomings.
The TDABC is ideal for the client because of its numerous benefits. I will outline some few case studies that were carried out to determine the relevance of successful implementation of TDABC (Järvinen and Väätäjä 2018). I will then show its benefits and the benefits of using it for TPG Telecom’s budgeting. A detailed was carried out to determine the success of its implementation in several business enterprises. The study was carried out in many organizations some of which were the medical centers and some business enterprises. TDABC was used to determine the cost of treating men with the urologic and the prostatic condition. It was implemented for all the inpatients and the outpatients who required specialized and primary care. The experts worked on the detailed processes to determine the personal costs of urology tests at the clinics (Kaplan et al. 2015). They discovered that the costs difference between the surgical and the diagnosis models for treating the prostatic condition in men was reasonably large. The TDABC implementation helped them to determine the costs factors to help them handle the patients’ disease in a way that was cost-effective.
Another case study was carried out in a furniture manufacturing firm which operated on a small scale (Ganorkar et al. 2018). This article explains a methodology that researchers described that could be used by small enterprises to adopt the TDABC system. The study showed that overhead expenses such as the rent, maintenance fee, and power usage were assigned to the final product (Gervais, Levant and Ducrocq 2010). The made the tracing of overhead costs straightforward and manageable. It also made the calculation of related expenses very manageable. It was, therefore, effortless to determine the profitable products and hence improve their productivity. The results could help the firm make more strategic decisions and identify the profitability opportunities.
Another research that was carried out by Anderson and Kaplan in the use of time factors in determining the costs of goods (Anderson et al. 2008). Their goals were to manage expenses, idle resources, and check for errors in budgeting. The model that they invented that was time-based was easy to use, and it took into account all the complex calculations that were needed. The model allowed the cost of idle resources and capacities to be taken into account. It helped them understand on how they could either use the unused resources to increase the profits or do away with them to prevent them from consuming the company’s finances without adding value to the company’s final product. His main aim was to show the accuracy of the estimates of time in determining the cost of products. They argue that timely factors play a role in determining the value of products produced and in turn their prices and the profitability (Kaplan and Anderson 2007). The earlier budgeting methods always left out the factor that time could influence. They argue that the TDABC was the best system that could be applied in budgeting. They also claimed that TDABC could help solve some of the problems that arose after the ABC was implemented on most companies (Szychta 2010).
Given all of the above, we have seen that TDABC helps any company to handle their budgeting and accounting facilities using their limited resources. It gives the business enterprises an opportunity to access the profitability of their organizations using the limited time and resources that they have. They can make more informed decisions on how they can consider appropriate factors to allocate the costs of their goods (Kont and Jantson 2011). In my view, I propose that I propose that TDABC is sufficiently the best that the TPL Telecom’s client should apply to assist him with budgeting. The client will understand better on the services the company can offer that are more profitable and cost-effective (Maria 2014). This improved budgeting could help the company to turn out being one of the largest service providers worldly. It will also help the company produce the best telecommunication devices and do away with those that are not bringing much profit. It will help the company to employ timely factors on labor to improve their productivity. The cost factors will be accurately represented per unit time, and the budget will appear more organized and accurate (Dalci, Tanis and Kosan 2010). The TDABC will help the company use their available minimum resources to maximize their profits and improve customer-company relationships to increase the market demand for their profits. It will also help the company to use cost-effective methods to increase the quality of their products by improving their time-based labor and resources. It will also help the company take into account every factor that contributes to the cost of production, and assist it how it can reduce the cost while maximizing the profit.
Conclusion
Given the above facts, it is important for all the business enterprises and other companies to implement the TDABC in their budgeting sector because it will help them identify the profitable opportunities and customers as well as determining the proper pricing of their products. It will help them identify the unprofitable business situations and evade them. The TDABC has more merits than demerits, and so all companies dealing with budgeting and accounting departments should consider implementing the new model.
References
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Donovan, C.J., Hopkins, M., Kimmel, B.M., Koberna, S. and Montie, C.A., 2014. How Cleveland Clinic used TDABC to improve value. Healthcare Financial Management, 68(6), pp.84-89.
Gervais, M., Levant, Y. and Ducrocq, C., 2009, May. Le Time Driven Activity Based Costing (TDABC):“New Wine, or Just New Bottles?”. In La place de la dimension européenne dans la Comptabilité Contrôle Audit (pp. non-paginé).
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.
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.
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.
Gylling, M., Heikkilä, J., Jussila, K. and Saarinen, M., 2015. Making decisions on offshore outsourcing and backshoring: A case study in the bicycle industry. International Journal of Production Economics, 162, pp.92-100.
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Järvinen, J. and Väätäjä, K., 2018. Customer Profitability Analysis Using Time-Driven Activity-Based Costing. Three Interventionist Case Studies.
Kaplan, A.L., Agarwal, N., Setlur, N.P., Tan, H.J., Niedzwiecki, D., McLaughlin, N., Burke, M.A., Steinberg, K., Chamie, K. and Saigal, C.S., 2015, March. Measuring the cost of care in benign prostatic hyperplasia using time-driven activity-based costing (TDABC). In Healthcare (Vol. 3, No. 1, pp. 43-48). Elsevier.
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