Time-Driven Abc

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Submitted By hustleguru
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Time-Driven ABC
Companies have shied away from activity based costing, because it was not an accurate assessment of operations, time consuming and too expensive to build and maintain. As a result managers have veered away from using traditional ABC in their organizations, and needed to find a solution to the problem. The new approach relies on informed managerial estimates rather than on employee surveys. It also provides managers with a far more flexible cost model to capture all the complex details of their operations. The way people traditionally constructed the ABC model was the root of the problem with it.
To build a traditional ABC model a department would survey employees to estimate the percentage of time they spend on activities and then assign the department's resource expenses according to the average percentages you get from the survey. Armed with figures, known as the cost-driver rates, managers could assign the costs of the department's resources to the customers and products that use its services. This worked well in the limited setting in which it was initially applied, typically a single department, plant, or location. The problem arises when you try to roll out this approach on a large scale for use on a continuous basis. The systems that are put in place are updated infrequently; the model's estimates of process, product, and customer costs soon become inaccurate. What's more, people waste their time arguing about the accuracy of cost-driver rates that are derived from individuals' subjective beliefs rather than addressing the deficiencies the model reveals: inefficient processes, unprofitable products and customers, and excess capacity. Traditional ABC models also often fail to capture the many details of actual operations. As the activity dictionary expands, the demands on the computer programs used to store and process the data escalate.…...

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