How to Build Your First TDABC Model: A Step-by-Step Guide

Building your first Time-Driven Activity-Based Costing model can seem daunting, but with a structured approach, most organizations can have a working model within 8-12 weeks. Here is a practical guide based on our experience implementing TDABC across multiple industries.

Step 1: Define the Scope

Start with a specific business unit, department, or process rather than trying to model the entire organization at once. Choose an area where cost visibility is most needed and where management suspects there may be significant cross-subsidies between customers or products.

Step 2: Identify Resource Groups

Map out the departments and teams involved in the scope you defined. Each resource group should contain people and resources that perform similar work at a similar cost. A typical first model includes 5 to 10 resource groups.

Step 3: Calculate Capacity Cost Rates

For each resource group, gather the total costs including salaries, benefits, equipment, facilities, and overhead. Then determine the practical capacity in minutes or hours per period. Divide total cost by practical capacity to get the cost per minute.

Step 4: Map Processes and Build Time Equations

This is the heart of TDABC. Walk through each process, observe how work is done, and document the time required for each activity. Build time equations that capture variations using conditional terms. Interview frontline staff, not just managers, as they understand the actual work better than anyone.

Step 5: Collect Transaction Data

Extract the data needed to drive your time equations from your ERP, CRM, or other systems. This includes order details, customer attributes, product characteristics, and any other variables referenced in your time equations.

Step 6: Run the Model and Validate

Run the calculations and compare total allocated costs against actual costs for each resource group. The difference reveals unused or idle capacity. Validate results with department managers and adjust time estimates as needed.

Step 7: Analyze and Act

Generate profitability reports by customer, product, channel, or any other dimension. Build your whale curve. Identify the biggest opportunities for improvement and develop action plans.