ABC method (Activity Based Costing) is a method of clearing the overhead costs caused by actions and processes necessary to produce and sell products and services. Execution of the operations requires the consumption of specified resources, which involves expenditures for the acquisition, and generates expenses.
So, according to ABC methodology, product valuation is assigning the appropriate costs to appropriate actions and only in the next step, to settle the operations directly to the right products (as per the appropriate keys). Practise shows that this solution is much more effective than methods used before, like full or variable cost accounting.
ABC and Time-Driven ABC – key differences
Difficulties in using the ABC method turned out to be connected with, among others, the selection of the appropriate allocation keys and continuous model actualization (a very time-consuming process). That is why it was only a matter of time until the appearance of the upgraded ABC method.
Time-driven ABC, because that’s what we’re talking about, is characterized by a unique approach based on the so-called time equation, which enables determinating time and cost of performing each of the company’s operations, oriented on a specific cost property.
The main advantages of Time-Driven ABC are:
- The simplicity of actualization and model maintenance compared to standard ABC
- Ability to determine the level of inefficiency of available resources
- No need for an excessive model expansion
- Increasing knowledge of the processes – their performance and efficiency
- Integration with existing ERP and CRM systems
- High precision of calculation algorithms
- Obtaining a stronger position in negotiating with clients
Has been working with the implementation of IT systems supporting management for 15 years. He specializes in Business and Workflow solutions. Enthusiast of using AI to support business processes. Archman’s CEO and chancellor of College of Economics And Computer Science in Cracow.