Activity-based and time-driven costing: where causality finally wins.

Stage 3 is the threshold the whole ladder is built toward. Below it, indirect cost is a fog of averages. At it, every euro of resource is traced to the work that caused it and onward to the output, customer or channel that needed that work. Activity-based costing does this through activities and drivers. Time-driven activity-based costing, developed by Kaplan and Anderson, does it more cheaply and more durably with two parameters only: the cost of supplying capacity per unit of time, and time equations that describe how long each variant of a process actually takes.

The reason we favour TDABC is practical. Classic ABC relies on staff interviews and surveys that are expensive to gather, hard to validate and quickly out of date. Time equations replace all of that with a model that updates as volumes and complexity change, and that, by construction, reveals the cost of unused capacity rather than burying it in the rates. That single property matters: in one widely cited review, only three of sixty-three organizations measured their unused capacity at all (IMA). At Stage 3, you can.

What it unlocks

An illustrative example. A services business moves from a blended hourly rate to a TDABC model with time equations for each engagement type. The whale curve that emerges is stark: a fifth of clients generate well over the total profit, the middle band roughly breaks even, and a tail of high-touch, low-fee clients gives a large share of it back. None of this was visible under the blended rate, because the average hid it. With the true picture, three levers open up at once: reprice the tail, reduce the cost to serve it, or change the relationship. Pattern consistent with published whale-curve findings (Kaplan); figures illustrative.