The vocabulary of cost and profitability.

Time-Driven Activity-Based Costing (TDABC) is a costing method that assigns the cost of resources to activities, products, customers and orders using just two parameters: the cost per unit of time of supplying capacity, and the time each activity consumes. It was introduced by Robert Kaplan and Steven Anderson in 2004 as a simpler, more scalable alternative to conventional Activity-Based Costing.

Activity-Based Costing (ABC) is a costing method that traces overhead and indirect costs to the activities that generate them, then assigns those activity costs to products, services and customers based on their consumption of each activity. It improves on traditional costing by recognising that different outputs consume support resources at different rates.

Traditional costing, also called absorption costing, is a method that spreads overheads across products using broad, volume-based allocation bases such as direct labour hours, machine hours or units produced. Because the base rarely reflects what actually drives cost, it tends to over-cost high-volume products and under-cost complex, low-volume ones.

Standard costing is a method that assigns predetermined ("standard") costs to materials, labour and overhead, then measures variances between standard and actual cost for control purposes. It is well suited to stable, repetitive production but can obscure the true cost of serving diverse customers and orders.

Marginal costing, also called variable costing, is a method that treats only variable costs as product costs and charges fixed costs to the period in which they arise. It supports short-run decisions such as pricing of incremental orders, but it does not allocate the capacity costs that TDABC and ABC make visible.

Resource Consumption Accounting (RCA) is a costing approach that combines a detailed view of resource pools and their capacity with the consumption logic of Activity-Based Costing. Like TDABC, it gives explicit visibility of unused capacity, but it typically models cost at a finer, resource-pool level of granularity.

Cost management is the discipline of planning, measuring, analysing and controlling the costs of an organisation so that resources are deployed profitably. It spans costing methods, capacity analysis, pricing and budgeting, and uses cost information to inform strategic and operational decisions rather than only to report results.

A method from the Theory of Constraints (Goldratt) that treats only truly variable cost (usually raw materials) as cost, and everything else as operating expense. It prioritises decisions by throughput (sales minus truly variable cost) per unit of the constraint, rather than by full product cost. Useful for short-term mix decisions under a binding bottleneck.

A method that works backwards from a market price and a required profit margin to a target cost the product must be designed to meet (target cost = price minus required margin). Originating in Japanese manufacturing (genka kikaku, associated with Toyota), it pushes cost management upstream into design, where most cost is locked in.

GPK (Grenzplankostenrechnung) is a German marginal costing method built on fine-grained cost centres and clear separation of fixed and proportional cost. Resource Consumption Accounting (RCA) is a modern synthesis of GPK and activity-based costing that models cost by the quantity of resources consumed, including unused capacity.

A costing method developed from the work of Georges Perrin and adapted in Brazil, which expresses all production in a single common unit of manufacturing effort (UEP). It simplifies multi-product factory costing by converting diverse outputs into a comparable effort measure. Widely taught and used in Brazilian manufacturing.

A Japanese method of continuous cost reduction applied during the production phase of a product, complementing target costing which acts during design. Kaizen costing sets gradual cost-reduction targets period by period and pursues them through small, ongoing improvements.

An accounting approach aligned with lean manufacturing that organises cost by value stream rather than by department, and avoids the overhead allocations that can distort lean decisions. It favours plain-language reporting and metrics that frontline teams can act on.

ABM turns the activity and cost-driver data produced by ABC or TDABC into action: eliminating non-value-added work, cutting the cost of complexity, and correcting pricing and mix. Costing tells you where money goes; ABM does something about it.

Two ways to cost output: job costing traces cost to a distinct job, order or batch; process costing averages cost across continuous mass production using equivalent units. Many real operations use a hybrid of the two.

The capacity cost rate is the cost of supplying one unit of a resource's capacity, usually expressed as a cost per minute or per hour. In TDABC it is the first of the method's two parameters and is calculated by dividing the total cost of a resource group by its practical capacity.

Practical capacity is the realistic amount of work a resource can perform in a period after deducting unavoidable downtime such as breaks, training, maintenance and set-up. In TDABC it is typically estimated at about 80 to 85 per cent of theoretical capacity and is the denominator used to calculate the capacity cost rate.

Theoretical capacity is the maximum output a resource could deliver if it operated continuously at full speed with no interruptions. It is rarely achievable in practice, which is why TDABC uses practical capacity, a reduced and realistic figure, as the basis for the capacity cost rate.

Used capacity is the portion of a resource's practical capacity actually consumed by activities in a period; unused capacity is the remainder that was supplied and paid for but not consumed. TDABC makes this split explicit, so managers can see and act on idle capacity instead of burying it in product costs.

The cost of unused capacity is the monetary value of resource capacity that was supplied and paid for but not consumed by any activity in the period. By isolating it, TDABC prevents idle capacity from being spread over products and customers, and turns it into a visible target for management action.

Capacity utilisation is the share of a resource's practical capacity that is actually used by productive activities in a period, expressed as a percentage. It is a key TDABC output because low utilisation signals unused capacity and an opportunity to grow volume, reprice, or release cost.

A time equation is a TDABC formula that estimates how long an activity takes by adding a base time plus increments for each characteristic that makes the work longer or shorter. It lets a single model capture variety, such as order size, channel or customer type, without creating a separate activity for every combination.

A cost pool is a grouping of related costs that are assigned together to activities or cost objects. In TDABC a cost pool usually corresponds to a resource group whose total cost is divided by practical capacity to obtain a single capacity cost rate.

A resource group is a set of people, equipment or facilities that share similar cost and capacity characteristics and are modelled together in TDABC. Each resource group has its own cost pool and capacity cost rate, which keeps the model compact while still reflecting how different resources are consumed.

A cost driver is the factor that causes the cost of an activity to change, such as the number of orders, deliveries, set-ups or invoices processed. In Activity-Based Costing the cost driver links activity costs to products and customers according to how much of each driver they consume.

A time driver is a variable in a TDABC time equation that changes how long an activity takes, for example the number of line items on an order or whether special handling is required. Time drivers let one equation model many variants of an activity accurately.

Unit cost is the cost of producing or serving one unit of a product, service, order or customer. In TDABC it is built up from the time each activity consumes multiplied by the relevant capacity cost rates, plus any directly traced costs, giving a defensible cost for any cost object.

Capacity supplied is the total practical capacity of a resource group that an organisation has paid for in a period, measured in time units. Comparing capacity supplied with capacity used reveals unused capacity and its cost, a core insight of the TDABC method.

Cost-to-serve is the total cost an organisation incurs to deliver a product or service to a specific customer, channel or order, including the often-hidden costs of selling, ordering, delivery, returns and support. TDABC is the natural method for measuring it because it traces these service activities through time.

Customer profitability is the net profit a customer generates after deducting both the cost of goods or services sold and the full cost-to-serve that customer. It often reveals that some large-revenue customers are unprofitable once service costs are included, and some small ones are highly profitable.

Net customer profit is the bottom-line profit left from a customer after subtracting product cost, cost-to-serve and any customer-specific discounts, rebates and trade spend. It is the figure plotted for each customer when building a whale curve.

A whale curve is a chart that ranks customers (or products) from most to least profitable and plots cumulative profit, producing a line that rises, peaks and then falls back, like a whale's profile. The peak shows that a minority of customers often generate more than 100 per cent of total profit, while others erode it.

Customer profitability analysis (CPA) is the systematic measurement of how much profit each customer or segment generates after their full cost-to-serve. It identifies which relationships create value and which destroy it, guiding decisions on pricing, service levels, minimum order sizes and account management.

The Pareto principle in costing, also called the 80-20 rule, is the observation that a small share of customers, products or SKUs typically accounts for a large share of profit, while a long tail contributes little or erodes it. It explains the shape of the whale curve and focuses management attention on the vital few.

Profit concentration is the degree to which an organisation's total profit is generated by a small number of customers, products or channels. High concentration, visible at the peak of a whale curve, signals both a strength (clear winners) and a risk (dependence on a few accounts and a loss-making tail).

The full cost of the activities that produce one unit of real result, used especially in non-profit and public-sector work, for example the cost of one person housed or one student supported. It includes the share of indirect cost that genuinely enabled the outcome, and is the honest alternative to judging an organization by its overhead ratio.

The mistaken belief that a low overhead ratio is proof of a good non-profit. Leading charity-rating bodies, GuideStar, BBB Wise Giving Alliance and Charity Navigator, publicly rejected the idea in 2013. A low ratio often signals underinvestment in the capacity a mission needs, not efficiency, and feeds the nonprofit starvation cycle.

CLV is the present value of the margin - not the revenue - a customer is expected to generate across the whole relationship. Built on true margin after cost-to-serve, it corrects the habit of chasing high-revenue customers who never pay their way.

Channel and segment profitability is the true profit of each route to market or customer group after the cost of serving it. The channel with the fattest gross margin is often the one that earns least once serving cost is counted.

Gross margin is revenue minus the cost of goods sold, expressed in money or as a percentage of revenue. It measures product-level profitability but, on its own, ignores the cost-to-serve, so a high gross margin can still turn into a loss once service and channel costs are included.

Contribution margin is revenue minus variable costs, representing the amount each sale contributes towards covering fixed costs and profit. It is useful for short-run decisions, but unlike cost-to-serve it does not capture the capacity costs of serving different customers and channels.

Net margin is the profit remaining after all costs, including cost of goods sold, cost-to-serve, overheads and customer-specific deductions, expressed as a percentage of revenue. It is the truest measure of profitability for a product, customer or order and the endpoint of a margin cascade.

A margin cascade is a step-by-step view of profitability that starts from gross revenue and deducts, layer by layer, discounts, cost of goods sold, cost-to-serve and customer-specific costs, until it reaches net margin. It shows exactly where profit is lost between the list price and the bottom line.

Cost-informed pricing is the practice of setting or adjusting prices using a true understanding of the cost to make and serve each product, customer and order. Built on TDABC cost-to-serve data, it corrects prices that were too low for costly-to-serve business and supports differentiated, profitable pricing.

Rate realisation is the proportion of a standard or list rate that an organisation actually collects after discounts, write-downs and concessions. Low rate realisation erodes margin even when headline prices look healthy, and a margin cascade makes the gap between intended and realised rates visible.

A markdown is a reduction from a product's original or list price, used to clear stock, match competition or close a sale. Markdowns directly reduce realised rates and margin, and when they are not tracked against cost-to-serve they can quietly turn profitable lines into loss-making ones.

Trade spend, also called deductions, is the money paid to customers or channels through rebates, allowances, promotions, listing fees and similar concessions. It often sits between gross and net margin in a cascade and can consume a large share of profit, so attributing it to the right customer is essential for accurate profitability.

CVP analysis is a short-run model linking selling price, cost behaviour and volume through the contribution margin. It answers how many units cover fixed costs (break-even), how many reach a target profit, and how sensitive profit is to volume.

The break-even point is the sales volume at which contribution margin exactly covers fixed costs, so profit is zero. Below it the business loses money; above it each unit's contribution drops to the bottom line.

The pocket price waterfall traces how a list price cascades through on-invoice discounts, off-invoice rebates, freight, terms and allowances down to the pocket price a business actually keeps. Much margin leaks in the off-invoice steps that dashboards miss.

Price realization is the share of list price a business actually keeps after every discount, rebate and leakage. Raising realization recovers margin without touching the list price.

SKU profitability is the net profit generated by an individual stock-keeping unit after its product cost and its share of cost-to-serve, including ordering, handling, storage and slow-moving stock. Analysing it usually reveals a long tail of SKUs that add complexity and cost without adding profit.

Product mix is the combination and relative proportions of the different products or services an organisation sells. Because each line has a different margin and cost-to-serve, a shift in mix can change overall profitability even when total revenue is unchanged, which is why mix is modelled in scenario analysis.

The cost of small orders is the disproportionate cost-to-serve attached to low-value orders, because activities such as order processing, picking, packing and delivery cost roughly the same regardless of order value. TDABC quantifies this, exposing orders that lose money once their full handling cost is counted.

A minimum order quantity (MOQ) is the smallest order an organisation will accept or fulfil profitably, usually set so that the order's value covers its full cost-to-serve. Setting an MOQ informed by TDABC data converts loss-making small orders into profitable ones or eliminates them.

The overhead allocation problem is the difficulty of assigning indirect costs to products and customers fairly, because there is no single volume measure that reflects how each one actually consumes support resources. Traditional costing solves it crudely with broad rates, while ABC and TDABC solve it by tracing costs through activities and time.

Peanut-butter costing is the practice of spreading overheads evenly and thinly across all products or customers, as if smearing them like peanut butter, regardless of how much each actually consumes. It produces averaged, misleading costs and is the root cause of cross-subsidy between simple and complex products.

A cross-subsidy in costing occurs when profitable products or customers unknowingly absorb costs that belong to unprofitable ones, because overheads are averaged rather than traced. ABC and TDABC remove cross-subsidies by assigning costs to whoever causes them, revealing the true winners and losers.

An activity is a discrete task or process that consumes resources, such as processing an order, picking goods, running a machine set-up or handling a customer query. In Activity-Based Costing and TDABC, activities are the bridge that links resource costs to the products and customers that trigger them.

A resource is anything an organisation pays for in order to perform work, including people, equipment, facilities and systems. In TDABC, resources are organised into resource groups, each with a cost pool and a capacity cost rate, so their cost can be traced through activities to cost objects.

Overhead is the indirect cost of running a business that cannot be traced directly to a single product or service, such as supervision, administration, IT and facilities. Allocating overhead accurately is the central challenge that Activity-Based Costing and TDABC are designed to solve.

An indirect cost is a cost that supports several products, services or customers and therefore cannot be traced to any one of them without an allocation rule. Indirect costs, also called overheads, are precisely the costs that TDABC assigns through activities and time rather than through arbitrary averages.

A direct cost is a cost that can be traced unambiguously to a single product, service or customer, such as raw materials in a product or a part bought specifically for one order. Direct costs are assigned straight to the cost object, while indirect costs require a costing method to allocate them fairly.

A fixed cost stays the same in total over a period regardless of activity volume, while a variable cost changes in proportion to volume. The distinction matters for marginal costing and break-even analysis, but TDABC adds a further insight: many "fixed" capacity costs become controllable once unused capacity is made visible.

A profitability dashboard is an interactive view that presents profit by customer, product, channel and order using consistent cost-to-serve and margin data. It turns a TDABC model into a management tool, letting users drill into whale curves, margin cascades and capacity utilisation to decide where to act.

A structured, transaction-level export of accounting and operational data from your ERP or accounting system. Because it contains granular, structured sales, cost and master data, it is a valuable ready-made input for building a TDABC profitability model quickly.

ERP CO-PA limitation refers to the gap between the profitability analysis built into ERP systems (such as SAP CO-PA) and a true cost-to-serve view. Standard CO-PA usually stops at gross margin and allocates overhead with broad rules, so it cannot reveal the activity-level service costs that TDABC exposes.

The order size that minimises the sum of ordering cost and holding cost, from the Wilson formula. A higher order frequency raises ordering and receiving cost; a larger order raises holding and capital cost. The textbook version often omits hidden costs such as receiving labour, quality and the opportunity cost of capital, which a causal cost model restores.

The full cost of acquiring and using something across its life, not just its purchase price: inbound logistics, receiving, inspection, storage, rework, returns, administration and disposal. In purchasing, comparing suppliers on TCO rather than unit price often reverses which one is cheapest.

The value of the best alternative given up when a resource is committed to one use. In inventory, capital tied up in stock cannot fund growth or pay down debt; in capacity, an hour spent on a low-margin job is an hour not spent on a better one. Often the largest hidden cost in a decision.

The total cost of preventing, detecting and fixing defects, plus the cost of failures that reach the customer. It splits into prevention, appraisal, internal failure and external failure costs. A return or rework consumes capacity twice, once to do the work and once to undo it.

A make-or-buy decision should count only relevant costs - future, incremental and avoidable - plus the opportunity cost of the capacity involved. Sunk costs and unavoidable overhead are ignored, which is why full absorbed unit cost misleads.

Financial accounting reports the past to outsiders under strict standards; management accounting is internal, tailored and forward-looking, built to support decisions. A business is steered by the management view, not the statutory one.

Life-cycle costing sums all the costs an asset or product incurs from design through operation and maintenance to disposal. It stops the cheapest to buy being mistaken for the cheapest to own, and feeds total cost of ownership.

The seven dimensions of a cost model are the criteria used to assess how mature and reliable an organisation's costing is, spanning aspects such as data quality, capacity treatment, granularity, driver logic, governance and decision use. Scoring a model across these dimensions shows where it can be trusted and where it must be strengthened.

Model governance is the set of rules, roles, documentation and review routines that keep a cost model accurate, current and trusted over time. Good governance defines who owns assumptions such as capacity cost rates and time equations, and how changes are validated, so the model stays a reliable basis for decisions.

Scenario modelling is the use of a cost and profitability model to test "what if" questions, such as changes in volume, mix, pricing or capacity, and to see their effect on profit before acting. Because TDABC links activities to capacity and time, it can simulate these changes realistically rather than by simple averages.

Scenario simulation is the interactive running of multiple scenarios through a profitability model to compare outcomes side by side and find the most profitable course of action. It extends scenario modelling with tools that let managers vary inputs and immediately see the impact on margins and capacity.

Profitability forecasting is the projection of future profit by customer, product or channel using a cost model together with expected volumes, mix and prices. Built on TDABC, it forecasts not only revenue but the capacity and cost-to-serve required to deliver it, making the forecast operationally grounded.

Profit-driven budgeting is a budgeting approach that starts from profitability and capacity rather than from last year's spend, using a cost model to plan the resources needed to serve forecast demand profitably. It connects the budget directly to cost-to-serve, mix and capacity decisions.

The balanced scorecard is a strategy and performance framework, developed by Robert Kaplan and David Norton, that measures an organisation across financial, customer, internal-process and learning perspectives. Paired with TDABC, it grounds its financial and process measures in accurate cost and profitability data rather than estimates.

Value-based healthcare (VBHC) is a model, associated with Michael Porter and Robert Kaplan, that organises care around patient value, defined as health outcomes achieved per unit of cost. TDABC is the costing method Kaplan recommends for VBHC because it measures the true cost of treating a patient along the full care pathway.

The IFRS link in cost accounting is the connection between management costing methods such as TDABC and financial reporting standards like IAS 2 inventory valuation or IFRS 8 segment reporting. Financial standards say what the reported number is; a TDABC model explains why it is that number and where profit is created.

A framework that describes how sophisticated an organization's costing is, from simple financial bookkeeping to predictive, capacity-aware costing. The most cited public reference is the Costing Levels Continuum, published by IFAC and authored by Gary Cokins, which runs from blind bookkeeping (Level 1D) to fully causal, predictive costing. As maturity rises, so do accuracy and the quality of decisions the numbers can support.

A budgeting method in which every activity must be justified from a zero base each cycle, rather than starting from last year and adjusting. Developed by Peter Pyhrr at Texas Instruments and published in Harvard Business Review in 1970, it strips accumulated waste, but only works well when a causal cost model gives managers true activity costs to justify against.

Building a budget from the activity and capacity a plan actually requires, rather than from last year plus a percentage. It is essentially time-driven costing run in reverse: start from planned output, derive the activities and the capacity needed, and cost them.

A self-reinforcing loop, described by Gregory and Howard in the Stanford Social Innovation Review (2009), in which funder pressure to minimise overhead leads non-profits to underspend on capacity and underreport it, which keeps funder expectations unrealistic, and so on. Full-cost funding and cost per outcome are the way out.

Funding a non-profit for what delivery genuinely costs, including the indirect capacity that enables outcomes, rather than capping overhead. It depends on being able to prove the true cost of outcomes, which a causal cost model provides. Advanced by the Nonprofit Finance Fund and others through the Full Cost movement.

The maturity framework published by IFAC and authored by Gary Cokins, describing costing along a descriptive path (levels 1D to 8D, from blind bookkeeping to fully causal costing) and a predictive path. Its organising idea is the causality principle: the more faithfully costs are assigned by cause and effect, the more useful the result.

OKR is a goal-setting framework pairing a qualitative Objective with a few measurable Key Results. In finance it only works when the key results are grounded in a real cost and profitability model; otherwise they drift into activity or vanity metrics that can improve while profit falls.

A key result is the measurable outcome tracked under an OKR objective. A financially meaningful key result is computed from a cost model - margin by customer, cost-to-serve, contribution margin - rather than an activity count such as orders processed or revenue booked.

EVA is profit after charging a business for the capital it uses: operating profit after tax minus a capital charge. Positive EVA means the return beat the cost of capital and value was created; profit alone can rise while EVA is negative.

ROIC is after-tax operating profit divided by the capital invested to earn it. Compared with the cost of capital (WACC), it tests whether growth actually creates value or destroys it.

Capital allocation is the discipline of deciding where a firm's money goes - projects, products, customers, acquisitions - funding only returns that beat the cost of capital. It turns profitability analysis into investment decisions.

A transfer price is the internal charge one part of a group books for goods or services sold to another part. For management accounting the goal is good decisions and fair unit profitability, not tax optimisation.

Driver-based planning builds each line of the plan from the operational drivers that cause it - volumes, rates, capacity - written as equations, instead of anchoring next year to last year plus a percent. It makes scenarios a change of input rather than a rebuild.

A rolling forecast is re-run every period over a constant horizon, always looking the same distance ahead, so it absorbs new information instead of measuring against a fixed twelve-month-old budget. It pairs naturally with driver-based planning.

In a transaction, a rapid cost-to-serve read rebuilds a target's profit by customer, product and channel, so a buyer sees which revenue is genuinely worth owning rather than just what the company charges. It often reorders the apparent quality of the earnings.

The cost of removing the next tonne of carbon, expressed in euros per tonne of CO2 equivalent. Ranked across all available actions it forms a marginal abatement cost curve that shows which reductions save money while cutting emissions and which cost more than they save, turning decarbonization into a ranked investment decision rather than a wish list.

Tracing emissions to the activities that cause them using real operational data, such as fuel burned, kilowatt-hours and kilometres, matched to specific emission factors. The GHG Protocol contrasts it with the spend-based method, which multiplies money spent by an average factor. It is the same causal logic as activity-based costing, with kilograms of CO2 equivalent on the end instead of euros.

The standard classification of corporate emissions under the Greenhouse Gas Protocol. Scope 1 is direct emissions from owned or controlled sources; Scope 2 is indirect emissions from purchased energy; Scope 3 is all other value-chain emissions, defined across fifteen categories and typically 70 to 90 percent of the total.

A principle in the EU Corporate Sustainability Reporting Directive requiring companies to report both their impact on the world (impact materiality) and the world's financial impact on them (financial materiality). It connects sustainability reporting to cost and value, which is where activity-based carbon accounting helps.

The rapid fall in the price of generating a token of a given quality from large language models, observed at roughly ten times cheaper per year, a term popularised by a16z. Counter-intuitively it does not lower total AI bills, because cheaper tokens invite far heavier token use per task.

The observation that when a resource becomes cheaper per unit, total consumption can rise faster than the price falls, so total spending increases. In AI, cheaper tokens lead to much heavier use through reasoning models and agents, which is why AI bills climb even as the price per token drops.

The full unit cost of producing one useful AI result, not just the API token price. It sums tokens times price per token, GPU-seconds times the practical capacity rate, human review minutes times loaded cost, plus the overhead of retries and governance. Net contribution is the value of the result minus that cost.