Implementing Time-Driven Activity Based Costing In Manufacturing Companies: A Case Study Of Super Technology Corp Essay.

Time-Driven Activity Based Costing (TDABC)

Question:

Discuss about the Management And Cost Managerial Accounting.

In the manufacturing business organizations, Cost Accounting plays an important part. Cost accounting refers to the process to record, classify, analyze, summarize, allocate and evaluate different kinds of alternative courses of actions in order to control the organizational costs. Cost control helps in the reduction of organizational costs that leads to higher profitability (Drury, 2013). Companies prefer to implement different types of costing system for their companies like Activity Based Costing (ABC), traditional costing system and others. In the recent years, the emergence of another major costing system can be absorbed; that is Time Driven Activity Based Costing, commonly known as TDABC. It can be seen that traditional costing approach is the most well-known costing approach among the companies. However, in the recent years, organizations are facing various step backs at the time of using traditional costing system. For this reason, Robert S. Kaplan and Steven R. Anderson developed TDABC in the year 2004 to overcome the difficulties of the use of traditional costing approach and ABC (Kaplan et al., 2014). The main aim of this report is to analyze and evaluate various aspects of TDABC and to show the suitability of the implementation of TDABC. As per the provided information, it is the responsibility of the management consultancy firm to show the client the right path regarding the implementation of TDABC. Various parts of this report show the description, features, comparison with ABC and traditional costing and suitability of TDABC in the client organization. 

The client of the consultancy firm is a spare part of cars manufacturing company and the name of the company is Super Technology Corp. The main operation of the company is to manufacture the spare automobile parts for different vehicles. At the same time, the aim of the company is to manufacture quality products. Quality products can be manufactured when there is less amount of variation in the production process. In the production operation of Super Technology Corp, the presence of variance can be seen in the whole process of manufacturing. Currently, the company is using traditional costing approach for their manufacturing process. Recently, the CEO of the company is considering the adoption and implementation of TDABC for their manufacturing process as the presence of these variances are putting negative effects on the final outputs of the companies. 

The earlier discussion shows that the concept of TDABC has been developed to overcome the difficulties of ABC and traditional costing approach. Under the process of TDABC, the costs of resources are directly assigned with the cost objects with the help of two sets of estimates; they are: 1) the cost per time unit for the supply of the resources capacity to the cost activities, and 2) an estimation of the required time units in order to perform an activity. For the calculation of the cost activities under TDABC, there are six specific steps. Step 1 is the identification of the services or the activities. Step 2 is the estimation of the total costs of each resource group. Step 3 is the estimation of practical time capacity for each resource group. Step 4 is the calculation of unit cost of each resource group. Step 5 is the determination of estimated time for each activity. Step 6 is the multiplication of unit cost of each resource group by the estimated time for the activity (McLaughlin et al., 2014).

Features of TDABC

In case of TDABC, it can be observed that this particular approach of costing has some specific features and they are discussed below:

• Under the process of TDABC, it becomes easier for the cost accountants to assign cost to the different activities of manufacturing. In addition, this process takes less time to work (Öker & Ad?güzel, 2016).
• The integration of TDABC can easily be done with the existing or available Enterprise Resource Planning (ERP) system of the companies that boosts the manufacturing process of the firms (Siguenza-Guzman et al., 2014).
• The production managers become able to generate accurate monthly reports of operation with the help of TDABC.
• The costing system under TDABC is considered as more efficient than ABC and traditional costing system as it properly utilizes the manufacturing capacity of the firms.
• The implementation of TDABC helps the production managers in the effective forecasting of resource demands (Öker & Ad?güzel, 2016).
• The implementation of TDABC provides inexpensive as well as fast changes in the costing models (Siguenza-Guzman et al., 2014).
• The implementation of TDABC makes small but important information available to the managers for solving different kinds of problems related with the manufacturing process.
• The major feature of TDABC is that it can be easily implemented and used in any kind of industry (Öker & Ad?güzel, 2016).

The above features of TDABC shows the superiority of this costing system compared to the other available system. 

It needs to be mentioned that TDABC has some major differences with the traditional costing system. At the same time, major differences can be seen between TDABC and ABC approach. The following discussion shows the differences:

The ABC method is considered as the reply of the inaccurate method of American accounting standards. The main area of concern of ABC costing is related with the what has been done in terms of activities rather than what has been spent (Rajabi & Dabiri, 2012). On the other hand, the main area of concern for TDABC is related with the identification of the capacity of each department or process and to make the allocation of cost of this capacity of resource group over the objective of costs based on the required time to perform each activity. Under the process of ABC, a number of cost pools along with different type of cost drivers can be seen. The cost pool is considered as the total cost associated with an activity and cost driver is a feature of ABC that affects the cost and performance of cost activities (Hardan & Shatnawi, 2013). In case of TDABC, if there is a decline in the demand of work in a particular department, the processes of TDABC helps the organizational managers in estimating the quantity of resources released. It implies that TDABC can capture various characteristics of a cost activity with the help of time equitation. Under the process of ABC, indirect costs are assigned on the cost activities and then they are assigned on the cost objectives. In addition, with the help of the cost drivers, expenses of indirect resources are allocated with the cost activities. In case of TDABC, the developed equation of TDABC helps in assigning cost and time in activities based on the objectives of each activity (Emblemsvåg & Bras, 2012). However, in case of both the TDABC and ABC, the calculation is done in six stages. Thus, from the above discussion, it can be seen that there are some major differences between TDABC and ABC.

The major difference between TDABC and traditional costing system is that traditional costing system is simple where TDABC is a more complex system. Under the system of traditional costing system, there is a requirement of cost objectives and used up resources for the evaluation of various cost activities; but in case of the TDABC system, dependency of various cost activities can be seen on the activities used in cost objectives (Rumble, 2012). Managements of the firms adopt the system of TDABC in the presence of high amount overheads along with large number of miscellaneous products. There is a requirement of highly reliable and accurate method of the management of organizational costs. However, in case of traditional costing system, the use of single overhead pool can be seen that is unable for the calculation of true cost. In the process of traditional costing system, random allocation of cost objects can be seen on the basis of labor or machine hours (Cooper, 2017). This can be considered as a major difference. The inclusion of identifiable products can be seen in TDABC where the arbitral accumulation of various expenses including salaries, depreciation and others can be seen in traditional costing system. In addition, under the process of traditional accounting system, accountants determine the cost of production after the production of all the products. However, in case of TDABC, the cost of production is determined based on the feedback of customers and pocket range. The implementation of TDABC helps in lowering cost of production for increasing productivity (Cohen, 2014). Thus, from the above discussion, it can be seen that there are clear differences between TDABC and traditional costing system. 

Differences between TDABC and Traditional Costing System and ABC

The above discussion shows different aspect of TDABC like features, differences and others. Now, it is essential to determine whether TDABC is appropriate in the manufacturing companies. The following discussion shows the suitability of TDABC in the companies:

• TDABC has the ability of the creation of proper insight in different cost activities carried out by the companies. In comparison to the cost associated in traditional accounting system, this information about costs play an important role in the process of strategic decision-making to best run the manufacturing process. Thus, in the absence of TDABC, companies will not be able to judge the impact of individual activities on the company’s profitability (Schulze, Seuring & Ewering, 2012).
• Another key benefit of the implementation of TDABC is the distinction between capacity used and capacity supplied. The process of the calculation of required time to continue different activities and to connect them with the clear cost calculations provides the managers with powerful insight for cost management. It leads to the use of unused capacities. In addition, the company can get idea about the places requiring increase in workload (Rumble, 2012).
• The system of TDABC covers all the areas of enterprise recourse planning and due to this, accurate costs can easily follow every order transaction of the companies. The implementation of TDABC shows an accurate picture of the processes to distribute costs to particular customers and to empower profitability analysis relationship (Hoozée, 2013).
• Most importantly, the implementation of TDABC helps the management of companies in making right decisions. Companies become able to identify, complex business processes with the help of TDABC, and it leads to the better negotiation with the customers (Carli & Canavari, 2013).
• The model of TDABC helps the business organizations in the identification of cost opportunities in order to increase the efficiency of whole production process. In addition, it helps in the increase in production capacity of the companies (Namazi, 2016).
• It needs to be mentioned that the model of TDABC can be easily updated as per the operation of the companies.

The above discussion shows the usefulness of TDABC in the companies. The implementation of TDABC in Super Technology Corp. will increase the amount of output of the company by reducing the cost of production as it will increases the efficiency of the whole production process. After that, the management of TDABC will be able to gain proper insight about the nature of cost of the company, as it is helpful in the integration of TDABC with other system of the company like enterprises recourse planning and others. Thus, based on the above discussion, it can be seen that TDABC will be suitable for Super Technology Corp.

Conclusion

The above discussion shows that TDABC is a modern approach of cost accounting in the companies. The features of TDABC show that this system is easy to assign to different cost activities; at the same time, TDABC can be easily integrated with the ERP system. According to the above system, it can be seen that TDABC has some major differences with the ABC system and traditional costing system. The differentiation shows that TDABC is superior to ABC system as it can be implemented in highly diversified companies with large amount of overheads as well as large number of products. It can also be seen that the system of TDABC allocates total costs among the cost activities more efficiently than the traditional costing system. Lastly, the study shows the suitability of TDABC in Super Technology Corp. for having different benefits. Most importantly, TDABC helps the companies in effective decision-making process. 

References

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