Time Driven Activity Based Costing (TDABC) in Service Industries
Time Driven Activity Based Costing – Pierre Omidyar, a computer programmer, formed the eBay incorporation in his own house in California. He designed a prototype of an auction site on his website and named it the Auction Web. From this business, he could charge the sellers for posting their items. A small portion of the auction sale from each sale meaning that the company got revenues from providing buyers and sellers a platform to trade. The business significantly grew and later established a platform where buyers and sellers would rate one another based on reliability and honesty. The company expanded by providing a wide range of products like home appliances, furniture, and electronics cars.
In the next financial year, the owner of the business hired Jeff Skoll being the first employee managing director of eBay. Much of the company’s success can be attributed to Skoll’s skills of designing a business plan which eBay adopted. By the end of 1996, the company had hosted over 250,000 auctions in its website. The following year, the company managed to host approximately two million users. At the start of 1998, Omidyar hired Meg Whitman to act as the Chief Executive Officer and the President of this corporation.
The new CEO brought diversified and experienced personnel from corporations like Disney and Pepsi. eBay was incorporated into the Public by the end of 1998. After this, the share price of the company rose up with three times its value and that how the owner became a billionaire. Due to the company’s success, eBay acquired Half.com. After this, users were able to purchase and sell their products at lower prices without the use of an auction.
By the end of the fiscal year 2002, eBay managed to acquire PayPal Inc., an online processing company. In the last decade, many companies have relied on eBay to buy or sell their equipment and machinery. The Company has consistently grown over the years which has enabled it to maintain loyal customers. Today, eBay is one of the largest companies dealing with e-commerce business In United States (Bazdan, 2011)
eBay is a service driven company, and hence a cost accounting system applies to this business (Ruhl, & Hartman, 1998). Alternatively, a time driven activity based costing approach used by manufacturing companies may also be utilized by services companies like eBay since it enhanced performance in the business and increases competitiveness. ABC system assists companies in managing their costs whereas TDABC enables cost managers to determine the different cost objects and identify areas that need improvement. Both service and manufacturing companies utilize similar procedures in the ABC system.
These steps include the identification of activities, cost drivers and their related activities. Concerning this, most expenses at eBay are found in research and development. In the financial year 2013, R& D expenses amounted to $1.77 billion. This is surprising since the selling expenses cannot be directly attributed to the transaction and auction services of eBay. However, eBay can use the TDABC system in its services activities.
One of the basic cost drivers of TDABC is time. This is utilized in allocating resources to costs objects. This method is essential since it reduces time wastage and eliminates the complication step that of allocating resource costs to activities and assigning them to cost objects. According to research, the time driven system to ABC defines time as a crucial cost driver because machinery and labor have elements which can be measured by the amount of time used in performing a particular task. Resource capabilities can also be developed by utilizing other metrics like storage capacity in gigabytes.
TDABC method is preferred since it utilizes the cost driver rates based on their ability to hold resources to conduct a particular activity (Kaplan and Anderson, 2004, p. 133). Managers in eBay would utilize this concept in estimating the demand for the resources per unit time needed for every activity like customer contacts and business transactions. Additionally, only two variables are required for each category of the resource; the unit cost used in supplying resource to each department and the consumption of resource by the organization’s activities.
In the first scenario, managers will be required to identify the different categories of resources which perform activities in eBay such as supervision, human resource, outside services, telecommunication department, IT support, legal and support department. For example, we may assume that the total cost in these activities for the Company unit/department which process all the website transaction is $480 million each quarter. The practical capacity will then be estimated for each unit. To develop a practical capacity of 85 percent, for instance, a manager can analyze the capacity in the previous quarter and then identify the percentage of a particular quarter which is 85 percent of a certain period.
Additionally, in this example, it is also assumed that the most significant transactions occurred without any delays such as labor breakdown. The capacity in minutes per quarter is also assumed to be 600 million. To compute the total cost of the resource capacity supplied, the cost analyses would divide the 480 million resource allocation supplied by the 600 million minutes. The cost per minute of supplying the resource capacity will, therefore, be $0.8 per minute; these include all customer services and website transactions.
Lastly, the manager can determine the time needed to perform customer service and website transaction per unit. For example, if the cost analyst determines that the website transaction per cost is 5 minutes per response, and 20 minutes for each customer inquiry, it, therefore, means that there will be a transaction cost of $4 and a customer inquiry of $16. From using the time driven cost information, the company is able to calculate meaningful costs for different activities.
From the analysis, it is evident that eBay can derive some benefits by utilizing the TDABC. Firstly, this approach provides management with a new focus on different costs. This improves the budget preparation which increases the business performance. The management is also able to come up with service mix decisions which enhance cost control in eBay. As a result, the administration can form accurate and appropriate decisions on how they can improve the business processes, pricing and customer services (Kaplan & Anderson, 2007). TDABC enables cost managers to determine cost efficiencies and how capacity can be utilized optimally. It is also the right way of predicting future resource demands.
eBay incorporation has faced recently faced stiff completion both locally and internationally. One of the rival companies includes the Alibaba which denying eBay more revenues. eBay may utilize a time driven ABC system which enables it to gain a competitive advantage over their competitors.
Additionally, the method is able to allocate the indirect costs like support to reflect the resource requirements and how consumes its resources in achieving customer and service activities. Management can monitor the resources by cutting the expenses hence enabling it to be competitive when determining the price structure. The budgeted expenses per unit such as customer inquiries and transaction costs can assist the management to cut down the costs without comprising the quality. Pricing strategies will also be determined based on these costs.
For services provided online, the management will have more information relating to indirect costs like R&D. The traditional ABC provides less information on direct costs and more labor costs involved. As a result, the cost per unit online services would be less since the business is not affected by physical and geographical factors.
The Company may utilize the low cost per unit in providing more competitive pricing and thereby offer quality online services. TDABC approach enables a company to determine the value of offering an online service and the cost of proving the service via traditional mechanisms. This enables the management to understand the overhead costs by identifying the activities involved in providing these services. This information is important since the management is able to form informed decisions which will increase the customer base.
In conclusion, TDABC use has significantly increased since it provides more and accurate information. This enables costs managers to respond quickly by lowering the costs used in providing the services. TDABC is a dynamic approach meaning that it can be used by both a manufacturing and an online service company. This method, therefore, proves to be more effective than the traditional ABC since it results in better management of costs.
References
Bazdan, Z. (2011). An International Economy and E-commerce Case Study: eBay. Our Economy (Nase Gospodarstvo), 57(3/4), 44-50
Ruhl, J. M. and B. P. Hartman. (1998). Activity Based Costing in the Service Sector. Advances in Management Accounting (6), 147-161.
Kaplan, R.S. & Anderson, S.R. (2007). Time Driven Activity Based Costing. Boston: Harvard Business School Press.
Kaplan, R.S. & Anderson, S.R. (2004). Time Driven Activity Based Costing. Harvard Business Review, November, 131-138.
Relevant Time Driven Activity Based Costing Material
Financial Management Concepts and Their Application – Focus on Activity Based Costing
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