Time-Driven Activity-based costing may be defined as a costing method that determines the business activities and allocate the cost of each activity with resources to all items and services according to the actual utilization by each organization (Hoozee & Bruggeman, 2010). This approach also assigns the indirect cost into direct cost as compared traditional costing. This report shows the suitability of time driven activity based costing approach for Wesfarmers Company. Wesfarmers is a leading Australian listed company and it is involved in numerous business activities, like supermarkets, hotels, liquor and services departments, home appliances, energy and fertilizers, industry and safety products and coal. The report explains the concept of Time driven activity based costing and its characteristics. The report discusses the basic factors which show the difference between the traditional costing and time driven activity based costing. The main purpose of this report is to check whether Time Driven Activity Based Costing is suitable for Wesfarmers Limited or not.
According to Azizul Islam & Jain (2013), Wesfarmers is an Australian listed company and the biggest private sector player which consist 220000 employees and has shareholder base of approximately 530000. The organization generated a big portion of its income from the Supermarkets and Grocery departments in Australia. Company diverse its business operations by covering various activities like supermarkets, hotel, services departments and industrial safety products. The main focus of the Wesfarmers Group is to ensuring that each of their departments has strong management capacity which is responsible for strategy improvement and performance, as well as day-to-day operational activities. Each department is overlooked by a senior division board of directors or control panel that includes the Company Managing Director and Finance Director and is guided by a large working cycle and governance framework. Company perceives that an enabling society is basic to inducing responsibility for delivering the results completed through the company’s corporate planning framework. Organization uses the extend forces in target setting and encouraging team members to be proactive in driving the formation of values in its businesses (Campbell, 2017). The organization looks to build up a culture that promotes advancements and rewards intensity and innovation. The company has respect for representatives, customers and providers and a constant concentrate on giving safe work environment is major to the way that company operates. Wesfarmers’ social obligation stretches out to maintaining of moral direction, environmental obligation, and group commitment. The important core values of the company consists the following factors (Kenny, 2011):
Honesty:
Organization acting morally in all dealings.
Transparency
Transparency and trustworthiness in detailing, response and ideas.
Accepting that errors will occur from time to time and look to gain from them (Lowitt, 2011).
Responsibility:
Remarkable allocation of authority and basic leadership to divisions
Responsibility for execution
Securing and increasing company image
Strength:
On the same side, the important goal of the organization is to give a satisfactory return to its shareholders. According to Rowe et al. (2014), the organization aims to accomplish this goal by focusing on the following factors:
Fulfilling the requirements of customer
Concept of Time-Driven Activity Based Costing and its Features
Concept: According to Ng & Popkin (2012), Time Driven Activity Based Costing refers to managerial bookkeeping approach that measures the actual cost of conveying products and services to the consumers. This model permits all assets, for example, personnel, devices, facility and indirect and support cost to be directly attributed not allocated to the company’s output of customer service. Time-Driven activity based costing provides new applications basic to any organization seeking to control cost, create smart investment decisions, and better manage service labels inside and outside the organization. Particularly, supervisors can now link strategic planning to operational budgeting, enhance due to the diligence procedure during mergers and acquisitions, and support consistent change activities, such as, lean management. Time-Driven Activity based costing enable company to reduce unessential complexity in their organization supply chain and upgrading staffing in vital parts of their workforce. A typical Time driven activity based costing model need fewer equations than the number of activities used in a conventional activity based costing model, consequently managing simplicity. This model also allows more assortment and complexity in orders, products, and consumers, hence including accuracy at minimal cost and effort. This model decreases the amount required and only needed estimation of two things:
According to Zott & Amit (2010), the key concepts of Time-Driven Activity Based Costing include:
Features of Time Driven Activity Based Costing
In the Time Driven Activity Based Costing, the total cost is divided into fixed cost and variable cost which is necessary to provide quality information in order to design an appropriate cost structure in an organization. The main characteristics of time-Driven activity based costing include (Stefano & Casarotto Filho, 2013):
Explanation of time equation and how time equation is used to allocate activity costs.
It gives accurate cost of the products and also it is one of the simple processes. Time Equation gives emphasis on estimating the process and also to produce accurate cost model. The actual time is identified and linked to different products and services in a proper way. For instance, In Wes farmers the packaging manager is giving focus on the process of packaging products for shipment. In the scenario, proper packaging is essential, so that products can be delivered properly. If the product is packed so that the requirements can be met and it will take 0.5 minutes to prepare it for shipment. If the products need new packaging then the manager will take into consideration various observations and then 6.5 minutes will be needed to supply new packaging. If the products are shipped through air then 2 minutes will be required to put the package in the container of air worthy. So the information that will allow the manager to evaluate the time required for the process of packaging will be:-Packaging time = 0.5 + 6.5 (If packaging is needed) + 2.0 (if shipping is done through air)
Time equation is used to allocate activity costs.
This below given example has reflected how time equation is used to allocate activity costs. Total cost of the particular process has been assigned to the particular process based on the quantity used, time involved and cost driver rate involved in the particular process system.
TDABC has been used in the above given table which reflects how we could bifurcate the expenses and cost incurred in the particular process system of the organization. However, assigned cost of the particular process could be compared with the total used cost, supplied material cost and unused capacity of the business. This will help in assessing the total cost of the whole process system.
Traditional costing: According to Weygandt et al. (2015), traditional costing frameworks apply an indirect cost to items which is depends on the predetermined overhead cost. Traditional costing structure treats overhead costs as a specific overhead cost costing framework treats overhead costs as a single pool of indirect costs. There are various stages included in the traditional costing procedure:
Time-Driven Activity based costing approach: According to Rasiah (2011), it determines the limit of each department or process of the organization and allocate the cost of this limit of gatherings over the cost object based on the time required to execute an activity. For instance, if the demands for representatives in these departments or process decays, this approach can estimate the number of resources release. Time-driven activity based costing captures the diverse characteristics of an activity by using time equations in which the time consumed by an activity is an element of various features. This time assigns the cost and time of the activity to the cost object which is based on the characteristic of each object. The unit cost of resources and time required to perform an activity are the two basic parameters use for this approach. Time-Driven activity based costing approach comprises the following six stages which are as follows (Ruiz-de-Arbulo-Lopez et al., 2013):
TDABC APPROACH CONCEPT: It is related to the time analysis and learns about importance shift in the costs of resources and also to the practical capacity. The focus is given on updating the resources as per time unit and also resource cost rate. It is one of the popular processes in the organization and also it is related to the management circles. The baselines are calculated for the operations and also to create a model (Monroy, Nasiri & Peláez, 2014). It gives focus on building a correct time based algorithm and also help to easily implement in various companies. It requires less time and resources so that proper implementation can take place. TDABC is based on the cost pools in which the cost rate of supplying resources is taken into consideration. It is suitable for each and every organization. The advantages are it gives accurate cost and also inexpensive and easy model. The emphasis is given on attaining the costs to activities that are suitable. The cost is applied on the operating cost. It is seen that TDABC takes into consideration various characteristics of an activity that are based on time equation (Öker & Ad?güzel, 2016).
|
Basis |
Traditional Costing |
TDABC |
|
Cost Pools |
One or constrained number |
Two parameters to evaluate the demand |
|
Suitable for organizations |
This model is suitable for labor intensive, low-overhead organizations |
For every organization. |
|
Advantages |
Easy model, cheap |
Accurate cost, inexpensive and easy model |
|
Concentration |
Focusing on dealing with expenses of functional departments or responsibly centers |
Focuses on attaining the costs to activities that are suitable. |
|
Applied cost |
Volume based cost drivers |
Operating period |
|
Basis |
Activity based Costing |
TDABC |
|
Cost Pools |
Many |
Determine cost of two parameters |
|
Suitable for organizations |
This model is suitable for capital intensive, product diverse, large-overhead organizations |
For every organization. |
|
Advantages |
Exact product costing |
Accurate cost, inexpensive and easy model |
|
Concentration |
Focuses on taking care of procedures and activities and answers to cross-functional problems |
Focuses on attaining the costs to activities that are suitable. |
|
Applied cost |
Activity based cost drivers |
Operating period |
According to Lee et al. (2010), Time-Driven activity based costing simplifies the costing procedure by reducing the need for meeting and study representatives for distributing the resources costs to each activity before driving them down to cost objects which includes orders, products and customers. The conventional activity based costing framework using transaction, while the Time driven activity based costing system uses time driver costs. Time driven activity based costing consists the following steps:
Moreover, this method is suitable for Wesfarmers Company because it gives an exact strategic cost and profitability model which is quick, reasonable, and simple to establish. Integration with the detailed transactional information can be accessible for business from Enterprise Resource Planning (ERP) and customer relationship administration frameworks. Time-driven activity based costing is depend on transactional costs which are particular involves individual orders, customers, forms, and provider. By adopting this model, Wesfarmers can simply stretch adaptable different and difficult enterprises with versatile applications programming and database innovation.
Wesfarmers should use time-driven activity based costing model to get certain benefits such as:
Standardized procedure: According to Trkman (2010), this model gives the company a coordinating costing framework which concentrated on enhancing margin, reducing waste, and improving volume run through the operation every month with information reflecting direct production margin in order to cover big volume driven procedures such as operation, inbound logistics, distribution center operations and buying and sourcing.
A wide diversity of products and customers: According to Porter & Heppelmann (2014), this model is portrayed with automation, product diversity and total overhead can be enhanced in Wesfarmers. Time driven activity based costing enables the company to make a clear aspect for those assets of an organization which comprises supervision, set up, order cost and material dealing with costs for activities and transactions are unrelated to the physical volume of units created. This model is considered as an inexpensive and detailed method of distributing overhead to unit cost proceeded until the point the emergence of activity based costing.
Adaptable and inexpensive: By encased this approach in an enterprise resource planning frameworks, the exact cost can easily follow each order transaction (Muller, 2010). Wesfarmers can overlook a persistently precise image of how cost is allocated to specific customers, enabling relationship profitability analysis. Organizations can change in work techniques and make accounting method becomes simplified by substituting huge quantities of activities with far fewer processes
Conclusion
From this report, it has been concluded that Time driven activity based costing is an effective tool to create and diminish the difficulty of cost dimension and distribution of resources. This report describes the suitability of Time driven activity based costing for Wesfarmers Company. The report describes the concept of time driven activity approach and its various features which make this model effective for business. The study shows the difference between the traditional costing and time-driven activity based costing. The report also concludes that Wesfarmers can get various advantages related to cost measurement and allocation of resources by adopting time-driven activity based costing.
References
Azizul Islam, M., & Jain, A. (2013). Workplace human rights reporting: a study of Australian garment and retail companies. Australian Accounting Review, 23(2), 102-116.
Campbell, J. (2017). Insights from the company monitor: Wesfarmers. Equity, 31(8), 16.
Hoozee, S., & Bruggeman, W. (2010). Identifying operational improvements during the design process of a time-driven ABC system: The role of collective worker participation and leadership style. Management Accounting Research, 21(3), 185-198.
Kenny, G. (2011). Diversification: best practices of the leading companies. Journal of Business Strategy, 33(1), 12-20.
Lee, C. L., Yen, D. C., Peng, K. C., & Wu, H. C. (2010). The influence of change agents’ behavioral intention on the usage of the activity based costing/management system and firm performance: The perspective of unified theory of acceptance and use of technology. Advances in Accounting, 26(2), 314-324.
Lowitt, E. (2011). The future of value: How sustainability creates value through competitive differentiation. John Wiley & Sons.
Monroy, C. R., Nasiri, A., & 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.
Muller, E. (2010). Building blocks as an approach for the planning of adaptable production systems. Advanced Manufacturing and Sustainable Logistics, 37-45.
Ng, S. W., & Popkin, B. M. (2012). Time use and physical activity: a shift away from movement across the globe. Obesity Reviews, 13(8), 659-680.
Öker, F., & Ad?güzel, H. (2016). Time?driven activity?based costing: An implementation in a manufacturing company. Journal of Corporate Accounting & Finance, 27(3), 39-56.
Porter, M. E., & Heppelmann, J. E. (2014). How smart, connected products are transforming competition. Harvard Business Review, 92(11), 64-88.
Rasiah, D. (2011). Why Activity Based Costing (ABC) is still tagging behind the traditional costing in Malaysia?. Journal of Applied Finance and Banking, 1(1), 83.
Rowe, A. L., Nowak, M., Quaddus, M., & Naude, M. (2014). Stakeholder engagement and sustainable corporate community investment. Business Strategy and the Environment, 23(7), 461-474.
Ruiz-de-Arbulo-Lopez, P., Fortuny-Santos, J., & Cuatrecasas-Arbos, L. (2013). Lean manufacturing: costing the value stream. Industrial Management & Data Systems, 113(5), 647-668.
Stefano, N. M., & Casarotto Filho, N. (2013). Activity-based costing in services: literature bibliometric review. SpringerPlus, 2(1), 80.
Trkman, P. (2010). The critical success factors of business process management. International journal of information management, 30(2), 125-134.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting. John Wiley & Sons.
Zott, C., & Amit, R. (2010). Business model design: an activity system perspective. Long range planning, 43(2), 216-226
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