Various factors are present which impose pressure on the organizations to provide good services at lower cost and some of these factors are, increase in demand of digital services, high cost in context of information, slowdown in economies, etc. For the purpose of dealing with these conditions, managers of organizations must increase and improve their knowledge of cost behavior and also understand the involvement of different costs in the organization (Gonzalez, 2014). Time-Driven Activity-Based Costing (TDABC) is the technique of cost management which helps the organization in developing accurate cost information related to different activities conducted in the organization. It is necessary to conduct research on the suitability of the TDABC in private organizations.
It is very difficult for organizations to implement the traditional model of ABC because this model includes high cost related to interview and survey of people and it is very difficult to maintain and update this model because of its complexity level. On the other hand, TDABC consider only two parameters that are unit cost of supplying capacity and the time required for performing any transaction and activity (Basuki & Riediensyaf, 2014).
This report defines the suitability of the TDABC in the private organizations of Australia, and for this purpose we choose BHP Billiton Plc. Structure of this report includes the short description of the client, detail description of TDABC and its features, difference between TDABC and ABC, and whether TDABC is suitable for BHP Billiton Plc. Lastly, paper is concluded with brief conclusion.
About BHP Billiton:
BHP is considered as leading Resource Company of the World. This company mainly engaged in extracting and processing of minerals, oil and gas. Almost 60000 employees are employed by the organization, primarily in Australia and USA. Products of the organization are sold worldwide. Global headquarter of the organization is situated in the Melbourne, Australia. BHP Billiton conducts its operation under Dual Listed Company structure and it has two parent companies that are BHP Billiton Limited and BHP Billiton Plc., and this organization is operated as single economic entity which is referred as BHP. BHP is run by a unified Board and management.
The main aim of this organization is to create value for long-term shareholders through the discovery, acquisition, development and marketing of natural resources. For this purpose, organization develop the strategy, and strategy of this organization includes own and operate large assets, long-life, low-cost, expandable, upstream assets diversified by commodity, geography and market. Operating model of the BHP Billiton allowed the organization to use their expertise across their business and it shas multifunctional teams which connect all the hierarchy’s of the organization for best results (BHP, n.d.).
TDABC & its features:
Every business organization needs the management which has clear understanding of the cost management, and this can only happen with the easy cost accounting model which can quickly reflect the changes occurred in the business as they occur. It must be noted that TDABC is completely different from the original activity-based costing (OABC). OABC provides strong model for costing varied products and services, but TDABC holds more variation and complexity related to products and services, as it helps the organization by providing information of high quality without the issues which are created by the OABC models (Kannaiah, 2015).
TDABC is a simple model which can easily, validated, maintained, and expanded. This model is considered as best costing technique for present environment of the business. This model mainly considers two parameters, and both the parameters are stated below:
- Unit cost related to supplying capacity of the organization.
- Required time for the purpose of performing an activity.
Capacity cost rate estimate- this model is initiated by identifying different groups of resources performing activities. It must be noted that capacity of resources is measured by using time availability, but some organizations also use the time-driven approach for the purpose of determining the capacity of resources measured in other units. The formula for calculating the capacity cost rate is stated below:
Capacity cost rate- Cost of capacity supplied/ practical capacity of resources supplied.
Unit Time estimate- this approach requires the organization to estimate the time needed to perform any transactional activity. Generally, estimations of time will be estimated either by directly observing the things or by conducting the interviews. Under this approach it is not necessary to estimate the exact time, roughly estimation of the time is sufficient.
It must be noted that TDABC ensures following positive features:
- It is an easy procedure, and organizations can implement it quickly.
- This model easily integrates with the data, and now available through the installation of ERP and CRM systems.
- It is not expensive in nature, and organization can maintains and update it quickly.
- This model has skill to measure to enterprise-wise models.
- It is very simple to incorporate additional features in this model related to specific orders, processes, suppliers, customers, etc.
- More visibility related to efficiencies of process and utilization of capacity.
- This model also has skill to forecast the resource demands for future, and this forecasting is clearly based on the predicted quantity of the order and complexity.
These above stated features help the ABC model to improve its efficiency and remove its deficiencies such as complex in nature, expensive financial system, etc (Kaplan, 2009).
How TDABC is different from ABC & traditional costing systems:
Additional features of TDABC help the organizations in many ways but this technique is different from original model of ABC and from other traditional costing techniques also. Difference between these three is stated below in detail.
TDABC & ABC:
Activity based costing is considered as accurate way for managers for the purpose of distributing costs to the consumers and products related to the services of departments. However, this model of costing loose its efficiency in large scale operations and other disadvantages are also there such as this model is expensive in nature and difficult to maintain. Abandon of ABC model is the not the right solution for this problem, because this model represents huge potential for companies on larger scale. Fortunately, this model becomes simpler because of the new approach known as time-driven ABC which overcomes from all these shortcomings.
The major difference between these two models is stated below:
It is not an expensive system.
It is an expensive costing method.
East to operate
Complex in nature
It uses duration cost drivers
It uses transaction cost drivers (Simple Studies, 2016).
Traditional costing system & TDABC:
In case traditional costing methods indirect cost was applied to the products and this is based on predetermined overhead rate. This type of costing methods considers the overhead costs as a single group related to indirect costs. These types of methods are finest in nature only if indirect costs are low in comparison of direct costs. Traditional costing methods include various parameters such as first it identify indirect cost, estimation of indirect cost for particular period, select cost driver with the casual link to the cost, estimate the amount of the cost driver for particular period of time, compute the preset overhead rate, and lastly applied the overhead to the products by using the preset overhead rate (Johnson, 2018)
On the other hand, TDABC is the simple model which mainly identified the capacity of each department or process. Subsequently, cost is allocated on the basis of the capacity of the resources groups over the cost object which is mainly depend on the required time for the purpose of performing an activity. In case demand or work related to these departments decreases, then it is possible for TDABC to estimate the quantity related to resources released. In other words, TDABC captures the different characteristics of an activity on the basis of time equations under which time consumed by any activity is considered as function of different characteristics. This model is considered as best costing technique for present environment of the business. This model mainly considers two parameters, and both the parameters are unit cost related to supplying capacity of the organization and required time for the purpose of performing an activity (Kuchta & Troska, 2007). Difference between the two is sated below:
Traditional methods of costing
It use indirect cost related to the activity.
It mainly identifies the capacity of each department and activity.
It uses various parameters for determining the cost.
It only uses two parameters to determine the cost.
It is suitable only when indirect cost is low in comparison of direct cost.
It is suitable in every situation (Kaplan, 2006)
Suitability of TDABC for BHP Billiton:
Annual report of BHP Billiton 2017 states that cost pressures occurred in complete resource industry, and the prices of the products are determined on the basis of commodity markets at global level. Generally, organizations do not have ability to offset these pressures related to cost through increase in the price and this adversely affects the productivity of the organization. Management of BHP made efforts to decrease the costs, but almost all the key costs inputs are linked and it unable the organization in reducing the cost and time lag. All this issues impact the operating margins of the company for an extended period of time.
Various assets of the organization such as those assets which produce copper are energy or water intensive because of which cost and earnings of the BHP would be affected in adverse manner by increase in cost and other interruptions related to supply. Some other reasons are also there which such as energy, fuel, and water was not available because of the different number of reasons such as changes occurred in climate, inadequate infrastructure capacity, interruptions in supply, etc (BHP, 2017).
However, it must be noted that BHP can deal with all these issues by adopting time-driven activity-based costing system as it helps the organization in improving their resource capacity and allocation of resources in adequate manner. Following are the reasons because of which TDABC is suitable for BHP:
- It removes the requirement for the time consuming, subjective, interview-and-survey process for the purpose of defined resources pools.
- TDABC ensures accurate accounts for the purpose of dealing with the complexities of business transaction by using the time equations. This process states the accurate time for needed for particular activity and also eliminate the requirement to track the multiple activities because it accounts the different costs related to single activity.
- This model reduce the processing time needed for go through the data and this can be done by using feeds related to data from ERP systems.
- This system is very easy to maintain and update such as by using the ERP systems they can easily update the capacity cost rates.
Bu using the traditional costing techniques, BHP overestimates the cost required for performing the activities because of which capacity usage of the organization is reduced. TDABC helps the BHP in simplify the various steps related to the costing technique. It must be noted that BHP requires effective ERP system for the purpose of implementing the TDABC successfully.
After considering the above facts, it can be said that TDABC is the modern form of ABC which is suitable for the private organizations as well. This system helps the organization in conducting their activities well planned and in well manner. It also reduces the risk of uncertainty.
TDABC is the simple model which mainly identified the capacity of each department or process. Subsequently, cost is allocated on the basis of the capacity of the resources groups over the cost object which mainly depends on the required time for the purpose of performing an activity. This model is considered as best costing technique for present environment of the business.
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