Reviewed by
Miguel Guimarães
Founding Partner, Cost and Profitability Consulting
More than 150 Time-Driven ABC engagements across 11 sectors since 2010, working within the Kaplan and Anderson framework.
About the author →Published Updated
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.
Both methods are set out at length elsewhere on this site. The full working reference for the time-driven version, with the capacity cost rate derived line by line and a worked example that closes back to the cost base, is time-driven activity-based costing, worked out in full.
| 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 since 2010 and keep them alive with CostCtrl, instead of letting them die in a spreadsheet.
Canonical works behind this method. Each opens in a new tab.
The Profit Check points you to the right method for your situation in 12 to 15 minutes.
Proof
A distributor in New Zealand. €1.335M of cost-to-serve made visible, then halved, and 830 loss-making customers brought down to 295.
Read the case study →Who you would be talking to
Miguel Guimarães, Founding Partner
Cost and profitability practitioner for 25+ years. Lectured alongside Professor Robert S. Kaplan at the CFO conference in Amsterdam (2009).
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Reviewed by
Miguel Guimarães
Founding Partner, Cost and Profitability Consulting
More than 150 Time-Driven ABC engagements across 11 sectors since 2010, working within the Kaplan and Anderson framework.
About the author →Published Updated