Time-Driven Activity-Based Costing in the Assembly Industry

By Vedernikova, Olga; Siguenza-Guzman, Lorena et al. | Australasian Accounting Business & Finance Journal, August 10, 2020 | Go to article overview

Time-Driven Activity-Based Costing in the Assembly Industry


Vedernikova, Olga, Siguenza-Guzman, Lorena, Pesantez, Johanna, Arcentales-Carrion, Rodrigo, Australasian Accounting Business & Finance Journal


(ProQuest: ... denotes formulae omitted.)

1. Introduction and background

In a globalized and highly competitive environment, there is a need to look for new costing approaches to improve the efficiency of production processes and to reduce costs. In fact, in accounting matters, remarkable achievements have been made, especially regarding cost issues and their management for its leading role in all companies, including assembly. This is because the only variable that can be controlled by an organization is the cost, while the price is imposed by the market (Ruiz de Arbulo et al., 2012).

Traditional volume-based costing systems have received numerous criticisms resulting from the arbitrary allocation of indirect manufacturing costs. Due to their nature, they cannot be easily quantified individually about the object of charge, unlike raw material and direct labor (Meric and Gersil, 2018). This drawback causes a substantial bias in the information concerning production costs (Santana et al., 2017). Therefore, it is difficult to answer questions about how and where charges are incurred and to detect inefficient activities or products (Soekardan, 2016).

To answer those questions, in the late 1980s, Cooper and Kaplan developed Activity-Based Costing, ABC. In this system, costs are assigned in the first instance to the activities and then to the products that consume these activities based on different cost drivers (Cooper and Kaplan, 1988). ABC is oriented towards obtaining more reasonable costs through the logical allocation of factory overhead, based on the direct relationship with the necessary activities to produce a good or service (Pawłyszyn, 2017). However, after the great enthusiasm for its application in the early '90s, companies stopped using ABC completely or continued implementing it, but only partially (Szychta, 2010). This effect was mainly due to its complexity, time-consuming, and high costs of implementation and maintenance (Rahman et al., 2018). Its high degree of subjectivity was also a concern since when allocating the percentages of time an employee carries out his/her activities, inevitably needs to be added up to 100% (Kaplan and Anderson, 2007). As a consequence, the processes operate at their full capacity without taking into account the idle and unused time. This makes the model theoretically incorrect (Namazi, 2016).

A major initiative to address the weaknesses of ABC was the development of a new costing model based on the time invested per activity by Kaplan and Anderson in 2004 (Tse and Gong, 2009). Time-Driven Activity-Based Costing (TDABC) is a much more precise and simplified approach in cost because of its simple integration into the management system, its ability to provide timely and accurate information, the lower maintenance cost, and its straightforward interpretation of data (Medeiros et al., 2017). This is especially true when fast changes in technologies towards automated processes produced notable growth in the proportion of overhead costs (Chansaad et al., 2012).

In the context of the existing literature, TDABC can be used in different environments that can be grouped into three principal fields: healthcare, industry, and libraries (Areena and Abu, 2019). Within the manufacturing industry, Stout and Propri (2011) highlight the potential power of TDABC and the vital role of enterprise resource planning (ERP) by partial implementation in an electronics company. The results of their research indicate that TDABC can provide more accurate costing information and easy to maintain models. Moreover, Ruiz de Arbulo et al. (2012) also suggest that TDABC is simpler and more accurate than ABC in the multi-product or multiprocess auto-parts factory through comparison of TDABC with a Value Stream Costing (VSC) in a tight manufacturing environment. The authors showed that TDABC could help to analyze overused or underused capacity. Ramida and Rungchat (2015) found that TDABC is a more accurate method to determine the appropriate prices for the products into a wooden toy manufacturing company. …

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