Both methods attribute overhead to the products and customers that cause it. They differ in how much work they take to build, how painful they are to maintain, and how well they cope with a business that does many different things. Here is the honest comparison.
Activity-Based Costing (ABC) was developed in the late 1980s to attribute overhead based on the activities that consume it, rather than spreading it by a single key. It asks staff what percentage of time each activity takes and spreads cost by those percentages.
Time-Driven Activity-Based Costing (TDABC) was formalised by Robert Kaplan and Steven Anderson in a Harvard Business Review article in 2004, with a full book following in 2007. It estimates the time each activity actually takes, in minutes, and the cost per minute of capacity, and attributes cost by time consumed. It was a direct response to the build and maintenance burden of the original ABC.
| Traditional ABC | TDABC | |
|---|---|---|
| How cost is split | Staff estimate the percentage of time each activity takes; cost is spread by those percentages. | Each activity is timed in minutes; cost is attributed by the time each transaction actually consumes. |
| Build effort | Heavy. Surveys and interviews across the organisation. | Lighter. Time equations from a smaller set of observations. |
| Maintenance | Costly. Re-survey whenever the business changes. | Updatable. Adjust the time estimates and rates as things move. |
| Handles variety | Averages it away. Struggles with order size and complexity. | Models it. Copes with mixed order sizes, channels and complexity. |
| Unused capacity | Hidden inside activity rates. | Made visible, separated from the cost of work actually done. |
| Best for | Stable, simple operations. | Operationally complex businesses: distribution, logistics, services. |
If your operations are stable and simple, traditional ABC can be enough. If your business mixes order sizes, channels and complexity, as in distribution, logistics and services, TDABC is almost always the better choice: it is faster to build, cheaper to maintain, and shows you the unused capacity ABC hides.
We have built TDABC models for 25 years and keep them alive with CostCtrl, instead of letting them die in a spreadsheet.
The Profit Check points you to the right method for your situation in five minutes.