Journal of Alternative Perspectives in the Social Sciences (2016) Volume 8 No 2, 248-262

Time Driven ABC as a new approach for allocating

costs in the Egyptian manufacturing companies -
Case Study

Badewy, Mohamed Khamis and Abd El Ghany, Mohamed Mohamed,

Kandel, Yaser Saeed Saad
Department of Accounting, Alexandria University,
Alexandria, Egypt
Abstract: This research aims to Identifying problems related to the
application of Activity Based Costing, and Demonstrating steps of applying
Time Driven Activity Based Costing according to the Egyptian
manufacturing environment. This paper explores some of the weaknesses of
traditional ABC and demonstrates how the new Time-Driven activity-based
costing overcomes many of these problems. Through a case study, we show
how to perform a time-driven activity-based costing and provide evidence of
the benefits of such an analysis. The results indicate that the time-driven
activity-based costing is easier and faster to build an accurate model than
activity-based costing.

Keywords: Activity Based Costing, Time Driven Activity Based Costing,

Case study, manufacturing, Egypt.

1. Introduction

The increase in automation had resulted in increasing the percentage of

indirect costs to total manufacturing costs and in decreasing direct labor costs
due to the diversification of products and complexity of transactions, which
in turn causes the traditional costing systems to be less relevant in allocating
these costs. Such a failure to allocate these costs accurately will cause the
costs of these products or services to misrepresent the real consumption of
the resources needed to produce these goods or services.

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This has motivated Kaplan in the eighties of the past century to develop
a new system for the allocation of indirect costs known as the Activity Based
Costing System (ABC) that aims to measure and link the enterprise costs to
its products and services. This activity Based Costing System has solved the
problem of inaccurate allocation of costs through allocating indirect
manufacturing costs based on activities before allocating these costs to the
cost objects (orders, products, services, customers,…etc.)

With the passage of time, different problems related to the Activity Based
Costing system had emerged which had caused many firms to terminate its
application or to stop its development till it became obsolete. Kaplan and
Anderson (2007) had noticed that these problems are related to the costs
associated with meeting the employees and the time spent in this process,
costs related to data storage, processing and reporting. This is in addition to
the difficulties related to adjusting the system. Also, the Activity Based
Costing System is theoretically incorrect because it ignores the unused
capacity.

As a result, Kaplan and Anderson (2003) developed a new system more

accurate in allocating the indirect costs called Time-Driven Activity Based
Costing. This new system provides managers with correct costing and
profitability information. Also it does not require meeting and counting
employees and it takes in consideration the change in time needed to perform
the service. This Time Driven Activity Based Costing System allocate
indirect costs of resources to cost objects through a framework that require
two groups of estimations which are the determination the costs needed to
provide resource capacity and the rate of providing resource capacity costs.
Bruggeman and Everaert (2007) found that this system provide many
advantages through designing accurate cost models relevant to the
enterprises working in environments characterized by sophisticated
activities.

This system also allows for adjusting the costing system with the
introduction of new products or services or when redesigning existing

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production or service transactions. Accordingly, the Time Driven Activity

Based Costing System is suitable in rapidly changing environments. This
research aims to Identifying problems related to the application of Activity
Based Costing system, and Demonstrating steps of applying Time Driven
Activity Based Costing system according to the Egyptian manufacturing
environment. The remainder of this paper is organized as follows: Section 2
covers the theoretical foundation of the Activity Based Costing. The
theoretical foundation of Time-driven Activity Based Costing is described in
Section 3. Case study is presented in Section 4. Finally, Section 5 includes
concluding remarks.

2. the theoretical foundation of Activity Based Costing:

“According to Argyris and Kaplan (1994), activity-based costing (ABC)

is a costing model created in the mid-1980s that provides more accurate
information to

Managers about the cost and profitability of their business processes,

products, services, and customers” Lelkes, (2009). “The objective of cost
systems is to make an accurate estimation of product costs of different cost
objects (customers, representatives, products …) in order to provide the
management relevant information to make decisions, to improve business
processes and to manage departments” Putteman, (2009).

“Activity Based Costing gives a more accurate view on reality. ABC

recognizes that some costs do not vary with a volume measure but with some
other measures. It’s a more sophisticated approach to attributing indirect
costs (resources …), first to activities and then to cost objects which create
demand for these indirect costs. As a result, better decisions are made. The
system is able to provide more accurate information on costs so that
management can focus its attention on products and processes accounting for
more profit” Putteman, (2009).

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The Activity Based Costing system can be applied through the following
stages according to Bruggeman and Everaert, (2006); Putteman, (2009):

1. Identify activities.

2. Determine the costs of the activities.

3. Determine the cost drivers of the activities.

4. Determine the volume of cost drivers.

5. Determine unit cost per cost driver for each activity.

6. Calculate the unit cost per product or service.

Figure 1: Activity based costing (Source: Putteman, 2009)

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On the other hand, Wegmann, (2007) showed The Activity Based Costing
allocation process and its weak point

Figure 2: Activity based costing process (Source: Wegmann, 2007)

In summary, implementing conventional Activity Based Costing

encountered the following problems:

• The interviewing and surveying process was time -consuming and

costly.

• The data for the ABC model were subjective and difficult to valid ate.

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• The data were expensive to store, process, and report.

• Most ABC models were local and did not provide an integrated view
of enterprise - wide profitability opportunities.

• The ABC model could not be easily updated to accommodate changing

circumstances.

• The model was theoretically incorrect when it ignored the potential for
unused capacity.

3. the theoretical foundation of Time-driven Activity Based

Costing:

“In the complex and dynamic environment of today, it is very important

for companies to know the exact product costs and profitability of products,
services and strategies. Cost systems must be able to quickly adapt to
changing circumstances. Ever increasing competition and globalization
result in high risks when wrong decisions have been made based on wrong
figures. As a response to these circumstances, time-driven activity based
costing (TD-ABC) was developed. This system provides accurate cost and
profitability information at a low cost manner” Putteman, (2009).

Time-driven activity-based costing (TDABC) was introduced by Robert

Kaplan in 2004 in an article in the Harvard Business Review Kaplan and
Anderson, (2004), followed in 2007 by a book Kaplan and Anderson,
(2007b). As such, this is the most recent innovation we consider. While the
book details several adoptions, objective survey evidence about the extent of
use has, to our knowledge, not been published.

Conceptually, TDABC is a logical application of the notion that the

supply and consumption of resources are distinct. The resulting concept of
time equations represents a fundamental departure from two-stage allocation
systems such as ABC and RCA Kaplan and Anderson (2007a, 2007b);

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Everaert et al. [2008] illustrate an application in customer profitability

analysis).

“A time-driven ABC model identifies the capacity of each department or

process and assigns the cost of this capacity to the volume and mix of work
performed. If, through continuous improvement or rationalization of product
lines, orders and customers, the company reduces the demand for work in
these different departments and processes, the time-driven ABC model
estimates the quantity of resources no longer needed so that managers can
take steps to redeploy these resources or manage them out of the company”
(Kaplan, 2006).

The time-driven approach consists of six steps (Bruggeman et al., 2007):

1. Identify resource groups and the activities for which they are used

2. Determine the costs of each group.

3. Estimate the practical capacity of each group.

4. Calculate the cost per time unit.

5. Determine the required time units for each activity.

6. Calculate the cost per transaction.

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Figure 3: Time-driven activity-based costing (Prepared by the researcher)

To capture these complexities, TD-ABC uses time equations. Such an

equation expresses the time which is consumed by a certain event of an
activity in function of different characteristics, the so-called time drivers.
The need for new material and the need for a special box are both examples
of time drivers Balakrishnan et al, (2012).

This equation is generally represented as follows (Bruggeman et al., 2007):

tj,k = ß0 + ß1.X1 + ß2.X2 + … + ßp.Xp

With tj,k = time required for event k of activity j.

ß0 = constant amount of time for activity j, independent of the Characteristics

of event k.

ßi = consumption of time for 1 unit of time driver i (i = 1 … p)

Xi = time driver i (i = 1 … p)

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p = number of time drivers which determine the time required to perform

activity j

“According to Kaplan and Anderson, the TDABC simplifies the ABC

method for three reasons:

-The number of activities is reduced and the analysis is made at the level
of the departments or of the processes. Kaplan and Anderson (2004)
present a case study where some 1200 activities have been reduced in
200 processes.

-The need to collect information from different services is limited

because of the use of standards.

-The different types of drivers are expressed in only one equivalent-time

driver” Wegmann, (2007).

(Kaplan and Anderson (2007); Namazi (2009); Max, (2007); Lambino,

(2007); Everaert et al, (2008)) showed The Time-driven activity based
costing approach overcomes these difficulties and has the following
advantages:

1. Easier and faster to build an accurate model.

2. Integrates well with data now available from ERP and customer
relationship management systems (this makes the System more dynamic
and less people -intensive).

3. Drives cost s to transactions and orders using specific characteristics of

particular orders, processes, suppliers, and customers.

4. Can be run monthly to capture the economics of the most recent operations

5. Provides visibility to process efficiencies and capacity utilization.

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6. Forecasts resource demands, allowing companies to budget for resource
capacity on the basis of predicted order quantities and complexity.

7. is easily scalable to enterprise wide Models via enterprise scalable

applications soft ware and database technologies.

8. Enables fast and inexpensive model maintenance.

9. Supplies granular inform at ion to assist users with identifying the root
cause of problems.

10. Can be used in any industry or company with complexity in customers,

products, channels, segments, and processes and large amounts of people
and capital expenditures.

On the other hand, Terzioglu and Chan, (2013) showed successful

implantation of time-driven activity based costing for both manufacturing
and services industry.

4. Case study:

A case study conducted to selected An Egyptian Company to implement

the proposed model and examine the information that may reveal by it in
helping to achieve the research objectives, The Company working in the field
of pharmaceutical industry that implementing the Activity Based Costing
system.

Data gathered from the accounting department especially from cost

manager and cost accounting members, also production manager provided
helpful support in the defining of activities in the manufacturing area.

4-1 calculates Practical capacity:

The average practical hours performed are calculated by subtracted the

average break and stoppage time from the maximum capacity:

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Table (1)

Department Employee/ Actual Actual Practical Practical

machines work work day capacity capacity
numbers hours through through the through quarter
the year year of the year

Tablets 245
7 hours 288 day 493920 hour 123480 hour
Employee

Veterinary 7 hours 288 day

3 machines 6048 hour 1512 hour
powders

Funnel 48 machine 7 hours 288 day 96768 hour 24192 hour

Ointments 26 machine 7 hours 288 day 52416 hour 13104 hour

Capsule 5 machines 7 hours 288 day 10080 hour 2520 hour

Drink 95Employee 7 hours 288 day 191520 hour 47880 hour

Droplets 80Employee 7 hours 288 day 161280 hour 40320 hour

4-2 calculates the practical rate:

To calculates the practical rate for each Department divided indirect costs
assigned to each department or the cost of supplying capacity by the practical
time calculated through quarter of the year for each department:

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Table (2)

Department Indirect costs Practical capacity the practical cost rate

through quarter of
the year

Tablets 4368621 pound 123480 hour 35.379 pound/hour

Veterinary
40451 pound 1512 hour 26.753 pound/hour
powders

funnel 823643 pound 24192 hour 34.046 pound/hour

Ointments 405897 pound 13104 hour 30.975 pound/hour

Capsule 78420 pound 2520 hour 31.119 pound/hour

Drink 1406601 pound 47880 hour 29.378 pound/hour

Droplets 1290873 pound 40320 hour 32.016 pound/hour

4-3 Results of allocating indirect costs to cost objects according to the

Activity Based costing and Time-Driven Activity Based Costing:

The following table shows the Results of allocating Indirect costs to cost
objects according to the Activity Based Costing and Time-Driven Activity
Based Costing:

Table (3)

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Department Activity Time-driven Unused costs

Based Activity Based
Costing Costing

Tablets 4368621 4251848.22 116772.78

Veterinary
powders 40451 37721.73 2729.27

funnel 823643 800319.322 23323.678

Ointments 405897 401219.175 4677.825

Capsule 254112 239828.259 14283.741

Drink 1406601 1364314.32 42286.68

Droplets 1290873 1105640.544 185232.456

5. Conclusion

The literature review for Activity Based Costing reveals that the model
implementation encountered a problem which may affects on its diffusion
rate hence the interest in the accounting community as low publication rate
of its topics.

On the other hand, the time-driven activity-based costing system is easier

and faster to build an accurate model than activity-based costing system. In
addition to provide cost and profitability information more accurate
compared to activity-based costing system. Finally it provides visibility to
process efficiencies and capacity utilization.

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