ACCT20001 Lecture Notes - Lecture 8: Cost Driver, Royal Automobile Club Of Victoria
16 May 2018
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Department
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Time-driven ABC
•Demonstrates how management accounting and the tools we have been using are continuing to
evolve.
-Continue to seek better ways to do things
-Meet the needs of practice
-Deliver more reliable tools of analysis
More recent developments
•The central features of time-driven ABC include:
-A focus on ‘time’ as the primary cost driver;
-Consideration of the ‘time’ taken to perform an activity;
-Differentiating between theoretical capacity and practical capacity expressed in ‘time’;
-Use of a standardised cost per time unit of capacity; and
-Flexibility to adapt to more complex settings and/or changing circumstances
•This means thats for time-driven ABC, the resource demands of each cost object are directly
estimated - unlike the conventional approach, where the resource costs are assigned to activities
and then to the cost object
•In conventional ABC, the cost driver rate is calculated as:!
Total assigned activity cost/Total activity quantity
•In time-driven ABC, the cost driver rate is calculated as:
•Cost per time unit of capacity x Unit times of activity
Illustration: Paisley Insurance!
Steps in time-driven ABC
1. Cost per time unit of capacity at Paisley’s billing department = $3.07
•The cost per minute of supplying capacity: $282,670/92,160 = $3.07
-$282,670 is the cost of supplying capacity at Paisley (monthly overhead billing
department costs)
-92,160 minutes is the total practical capacity provided by 12 full-time employees
•Each individual works 8 hours per day, 9600 minutes per month at theoretical full capacity
-80% of 9600 = 7680 practical capacity for 1 worker x 12 workers = 92,160 total minutes
per month
2. Unit times of activity
•This is the time it takes to carry out one unit of activity for each of the four activities identified at
Paisley
•Analysis of each activity identified that staff can perform an account enquiry in roughly 2.8
minutes, correspondence in 3.3 minutes, account billing in 0.03 minutes and verification in 1.8
minutes.
•Consider estimated nature of unit times
1
Document Summary
Time-driven abc: demonstrates how management accounting and the tools we have been using are continuing to evolve. Continue to seek better ways to do things. More recent developments: the central features of time-driven abc include: A focus on time" as the primary cost driver; Consideration of the time" taken to perform an activity; Differentiating between theoretical capacity and practical capacity expressed in time"; Use of a standardised cost per time unit of capacity; and. Total assigned activity cost/total activity quantity: in time-driven abc, the cost driver rate is calculated as, cost per time unit of capacity x unit times of activity. Steps in time-driven abc: cost per time unit of capacity at paisley"s billing department = . 07, the cost per minute of supplying capacity: ,670/92,160 = . 07. ,670 is the cost of supplying capacity at paisley (monthly overhead billing department costs)
