TDABC vs ABC: same goal, very different effort.
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.
Two methods, one common origin.
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.
If you decide the time-driven version is the one for your business, the online TDABC course builds a working model on your own data over three to four weeks.
| 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.
Common questions.
What is the difference between TDABC and ABC?
Is TDABC more accurate than ABC?
When was TDABC introduced?
Sources
Canonical works behind this method. Each opens in a new tab.
- PaperMeasure Costs Right: Make the Right DecisionsCooper, R. & Kaplan, R. S. (1988). Harvard Business Review 66(5).Seminal argument that averaged overhead distorts true product and customer cost.
- PaperProfit Priorities from Activity-Based CostingCooper, R. & Kaplan, R. S. (1991). Harvard Business Review 69(3).Shows how ABC reveals unprofitable customers and products hidden by averaging.
- BookCost & Effect: Using Integrated Cost Systems to Drive Profitability and PerformanceKaplan, R. S. & Cooper, R. (1998). Harvard Business School Press.Comprehensive framework linking ABC to product and customer profitability.
- PaperTime-Driven Activity-Based CostingKaplan, R. S. & Anderson, S. R. (2004). Harvard Business Review 82(11).The founding article defining TDABC and its two-parameter model.
- BookTime-Driven Activity-Based Costing: A Simpler and More Powerful Path to Higher ProfitsKaplan, R. S. & Anderson, S. R. (2007). Harvard Business School Press.Book-length treatment of TDABC with implementation cases.
Not sure which fits your business?
The Profit Check points you to the right method for your situation in 10 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. Presented the Damco cost-to-serve case at Managing for Profit (Amsterdam RAI, December 2009), on the same programme as Robert S. Kaplan.
Call +351 910 313 731
Both traditional activity-based costing and time-driven ABC aim to put overhead where it is really consumed. They reach a similar answer for CaP, but TDABC gets there with two parameters instead of dozens of cost pools, updates in days rather than weeks, and shows the idle capacity that classic ABC leaves hidden.
| Dimension | Traditional ABC | Time-driven ABC (TDABC) |
|---|---|---|
| Data source | Employee surveys and interviews | Two parameters: capacity cost rate and time per activity |
| Build time | Weeks to months | Days |
| Update effort | Re-survey when anything changes | Adjust the time equation |
| Cost pools | About 50 activity pools | Three resource groups with time equations |
| Unused capacity | Not visible (100% of cost spread) | Made explicit and costed |
| Accuracy | Good, but degrades as it ages | Equivalent, and stays current |
The essentialsTDABC reaches the same insight faster and shows the idle cost that ABC hides.
Workshops
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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