Recognition of Idle Resources in Time-Driven Activity-Based ...

JAMAR Vol. 7 · Number 2 · 2009manage product costs by changing quantitiesof organisational outputs. Under traditionalvolume-based costing models and the ABCmodel, costs associated with idle resources areallocated to cost objects. Product costs areinflated and management may accidentallystart the fixed cost death spiral by removingproducts or services that consume fewerresources than they appear to consume (van deMerwe and Keys, 2001). By removing impactsof idle resources on product costs, TDABCand RCA models enable cost managementsystems to provide more accurate informationon product costs (Benjamin and Simon, 2003;Kaplan and Anderson, 2004).The ABC model differentiates itself fromtraditional volume-based costing models byenabling cost management systems to provideinformation on how operating activities addvalue to organisational outputs throughlinkages between resource pools and cost pools(type 2 information). With this type ofinformation, management can reduce productcosts by reducing or eliminating non valueaddedactivities (Gosselin, 1997). As both theTDABC and RCA models adopt activity-basedparadigm in the models, cost managementsystems that are based on the two models canalso provide information on linkages betweenresource pools and cost pools.While adoption of the ABC model enablesmanagement to eliminate non value-addedactivities by using information on howoperating activities add value to organisationaloutputs, it provides little insights on howvalue-added activities can be managed. In theTDABC and RCA models, provision ofinformation on idle resources effectively fillsthis gap.As idle resources do not make directcontributions to operating activities, theirexistence represents inefficiencies in anorganisation’s operations. Management canimprove operational efficiency by reducingquantities of idle resources. Idle resources canbe reduced by either increasing organisationaloutputs or reducing quantities of committedresources (Buchheit, 2003). By providinginformation on idle resources in resourcepools, TDABC and RCA models enablemanagement to improve an organisation’sefficiency in performing its value-addedactivities.Table 1: Comparison of TDABC and RCA modelsTime-Driven ActivityBased CostingRelationship with other System independentinformation systemsOrganisation of resource Cost-based resource poolspoolsComposition of resource All resource costs arepoolsvariableCross-allocation of resource No cross allocation amongcosts among resource poolsAllocation of resource coststo cost objectsresource poolsActivity-based costallocationResource ConsumptionAccountingERP-compliantTechnology-based resourcepoolsResource costs can be eitherfixed or variableCross allocation amongresource pools is allowedBoth activity-based andvolume-based cost allocationare allowedTDABC and RCA Models in Action –Department MDepartment MIn this section, an ABC-based costing modelfor a hypothetical production department isconverted to two costing models that are basedon the TDABC model and the RCA modelrespectively. The two new costing models arethen used to allocate resource costs to itsproducts.Department M is a hypothetical productiondepartment in a manufacturing firm. It is anautonomous organisational unit that involvesin production of three products, namelystandard, deluxe and premium.45

JAMAR Vol. 7 · Number 2 · 2009Figure 1: ABC-Based Costing Model for Department MWages &SalariesAdministrationStandardDepreciationAssemblyDeluxeEnergyQualityControlPremiumFactorySuppliesFigure 1 presents an ABC-based costing modelfor allocation of resource costs in departmentM. Four resource pools, namely wages andsalaries, depreciation, energy and factorysupplies are identified in the model. Resourcecosts for the current accounting period arepresented in Table 2.The four resource pools are linked to threeactivity pools: administration, assembly andquality control. Administration is a facilitylevelactivity that bears no relationship withoutput levels while assembly and qualitycontrol are unit-level and batch-level activitiesrespectively. After allocating resource costs tothe three activity pools, activities costs aresubsequently allocated to three cost objects(product lines): standard, deluxe and premium.Quantities of resource drivers and activitydrivers for the current accounting period arepresented in tables 3 and 4 and outcomes of theallocation process are presented in table 5 and6.Table 2: Resource Costs and Resource DriversResource Cost Resource DriverWages and Salaries $100,000 Labour HourDepreciation $150,000 Square MetreEnergy $20,000 KilowattFactory Supplies $7,500 KilogramTable 3: Quantities of Resource DriversResource Driver Administration Assembly Quality ControlLabour Hour 2,500 7,000 500Square Metre 2,000Kilowatt 30,000Kilogram 6,000 1,50046

JAMAR Vol. 7 · Number 2 · 2009Table 4: Activity DriversActivity Activity Driver Standard Deluxe PremiumAdministration Product Line 1 1 1Assembly Unit of Production 2,200 1,000 300Quality Control Inspection 88 100 60Table 5: Allocation of Resource Costs to Activities – ABC-Based Costing ModelResource Administration Assembly Quality ControlWages and Salaries $25,000.00 $70,000.00 $5,000.00Depreciation $150,000.00Energy $20,000.00Factory Supplies $6,000.00 $1,500.00Total $25,000.00 $246,000.00 $6,500.00Table 6: Allocation of Activity Costs to Product Lines – ABC-Based Costing ModelActivity Cost per Activity Driver Standard Deluxe PremiumAdministration $8,333.33 $8,333.34 $8,333.33 $8,333.33Assembly $70.29 $154,628.57 $70,285.71 $21,085.71Quality Control $26.21 $2,306.45 $2,620.97 $1,572.58Total $165,268.36 $81,240.02 $30,991.62From ABC to TDABCConversion of an ABC-based costing model toa TDABC-based one is relatively simple.Relationships between resource pools,activities and cost objects identified in theABC-based costing model can be adopted inTDABC-based model directly and informationprovided by ABC-based cost managementsystem can be used to derive the resourceactivitydrivers.Figure 2 presents a TDABC-based costingmodel for Department M. In the first glance,the new TDABC-based model does not lookmuch different from the ABC-based model.The two models have same resource cost pools,same activities and same cost objects.However, under the TDABC-based model,there is no activity pool in the model. Resourcepools are linked to cost objects directlythrough resource-activity cost drivers (Kaplanand Anderson, 2004; Barrett, 2005). Eachresource-activity cost driver represents anindependent link between a resource pool anda cost object that consume a particular activity.In Department M’s case, each resource pool islinked to one to three resource-activity costdrivers. The number of resource-activity costdriver between a resource pool and a costobject depends on the number of activities thatconsume the same resource. For instance, thewages and salaries cost is consumed by all ofthree activities (administration, assembly andquality control). Therefore, the wages andsalaries cost is linked to all cost objectsthrough three separate resource-activity costdrivers. In contrast, the energy cost is onlylinked to cost objects through one resourceactivitydriver as the energy cost is consumedby the assembly activity only. The value of aresource-activity cost driver is calculated bymultiplying resource costs per hour andnumber of hours for an activity (Kaplan andAnderson, 2004; 2007). Table 7 presents theinformation on resource costs per hour for eachresource. For depreciation, the level ofcapacity (7,200 hours) is determined by thelevel of capacity of the resource that serves thesame activity (i.e. energy).Table 8 presents the information on time spenton each activity. The administration activity isa facility-level activity and each product line isassumed to consume same amount ofadministration cost. As such, the number ofhours spent on each product line is equal to thetotal number of hours spent on administrationactivities (2,550 hours) divided by number ofproduct lines and the resource-activity driverfor allocating wages and salaries cost (the onlyresource cost for the administrative activity) toeach product line is equal to the wages andsalaries cost per hour cost multiplies thenumber of hours spent on each product line.47

JAMAR Vol. 7 · Number 2 · 2009Figure 2: TDABC-Based Costing Model for Department MWages &SalariesStandardDepreciationDeluxeEnergyPremiumFactorySupplies.Table 7: Resource Costs per HourResource Capacity (hours) Cost per HourWages and Salaries 10,000 $10.00Depreciation 7,200 $20.83Energy 7,200 $2.78Factory Supplies 7,500 $1.00Table 8: Activity TimesActivity Level Unit of Activity ProductLineTime per Unit(hours)Number of Units Total Time(hours)Administration Facility Product Line - 850 3 2,550Assembly Unit Unit of Production Standard 1.8 2,200 3,960Deluxe 2.2 1,000 2,200Premium 3.0 300 900Quality control Batch Inspection Standard 0.5 88 44Deluxe 0.5 100 50Premium 1.0 60 60Total 9,764In comparison, assembly activity is a unit-levelactivity and the unit of activity is the numberof units in each product line. As amounts oftime used to produce a unit in each productline differs, each resource-activity driver forallocation of a resource cost to a particularproduct line has a different value. Each ofthem is equal to the per hour cost of thatresource multiplied by the number of hoursspent on producing a unit in a particularproduct line.Quality control activity, as a batch-levelactivity, uses the number of inspections asunits of activity. A resource-activity driver foreach product line is equal to the per hour costof a resource multiplied by the number ofhours spent on an inspection.After determining values of all resourceactivitydrivers, the resource costs are allocatedto the three product lines. The outcomes of theallocations of resource costs are presented in48

JAMAR Vol. 7 · Number 2 · 2009Tables 9-14. As shown in Table 14, not allcommitted resource costs are allocated to theproduct lines. The difference between aresource cost and the total resource costallocated to the three product lines is the costof idle resources.Table 9: Allocation of Wages and Salaries Cost to Product Lines – TDABC-Based Costing ModelProduct Line Activity Resource-Activity Driver Unit of Activity Cost AllocatedStandard Administration $8,500.00 1 $8,500.00Assembly $18.00 2,200 $39,600.00Quality control $5.00 88 $440.00Deluxe Administration $8,500.00 1 $8,500.00Assembly $22.00 1,000 $22,000.00Quality control $5.00 100 $500.00Premium Administration $8,500.00 1 $8,500.00Assembly $30.00 300 $9,000.00Quality control $10.00 60 $600.00Total $97,640.00Table 10: Allocation of Depreciation Cost to Product Lines – TDABC-Based Costing ModelProduct Line Activity Resource-Activity Driver Unit of Activity Cost AllocatedStandard Assembly $37.50 2,200 $82,500.00Deluxe Assembly $45.83 1,000 $45,833.33Premium Assembly $62.50 300 $18,750.00Total $147,083.33Table 11: Allocation of Energy Cost to Product Lines – TDABC-Based Costing ModelProduct Line Activity Resource-Activity Driver Unit of Activity Cost AllocatedStandard Assembly $5.00 2,200 $11,000.00Deluxe Assembly $6.11 1,000 $6,111.11Premium Assembly $8.33 300 $2,500.00Total $19,611.11Table 12: Allocation of Factory Supplies Cost to Product Lines – TDABC-Based Costing ModelProduct Line Activity Resource-Activity Driver Unit of Activity Cost AllocatedStandard Assembly $1.80 2,200 $3,960.00Quality control $0.50 88 $44.00Deluxe Assembly $2.20 1,000 $2,200.00Quality control $0.50 100 $50.00Premium Assembly $3.00 300 $900.00Quality control $1.00 60 $60.00Total $7,214.00Table 13: Total Costs Allocated to Product Lines – TDABC-Based Costing ModelStandard Deluxe PremiumAdministration $8,500.00 $8,500.00 $8,500.00Assembly $137,060.00 $76,144.44 $31,150.00Quality Control $484.00 $550.00 $660.00Total $146,044.00 $85,194.44 $40,310.00Table 14: Summary of Resource Costs Allocation – TDABC-Based Costing ModelResource Committed Cost Allocated Cost Cost of Idle ResourceWages and Salaries $100,000.00 $97,640.00 $2,360.00Depreciation $150,000.00 $147,083.33 $2,916.67Energy $20,000.00 $19,611.11 $388.89Factory Supplies $7,500.00 $7,214.00 $286.0049

JAMAR Vol. 7 · Number 2 · 2009From ABC to RCAUnlike the ABC and TDABC models, the RCAmodel allows for the separation of fixed andvariable components in cost pools and theconcurrent use of both activity-based andvolume-based cost allocation methods (van derMerwe and Keys, 2001; 2002). Therefore, theallocations of RCA-based costing models arelikely to be significantly different from thosebased on other costing models. To convert anABC-based costing model to a RCA-basedone, additional information on organisationalresources and cost behaviour of all resourcesmust be collected before the conversionprocess begins. Tables 15 and 16 present theadditional information collected for thedevelopment of an RCA-based costing model.Table 15: Resource PoolsResource Pool Fixed Cost Variable Cost Unit Unit CostLabour $30,000.00 $70,000.00 Labour Hour $9Machinery $102,000.00 $68,000.00 Machine Hour $8.5Indirect Materials N/A $7,500.00 Kilogram $1Table 16: Consumptions of ResourcesResource Pool Assembly Quality ControlLabour 7,060 154Machinery 7,100Indirect Materials 7,000 496Figure 3: RCA-Based Costing Model for Department MLabourWages &SalariesFixedVariableStandardMachineryDepreciationEnergyFixedVariableAssemblyQualityControlDeluxePremiumIndirect MaterialsFactorySuppliesThe RCA-based costing model for DepartmentM is presented in Figure 3. Under the newmodel, three resource pools, namely labour,machinery and indirect materials are identified.The division of resource pools is based on thetechnologies employed by the resources50

JAMAR Vol. 7 · Number 2 · 2009(Clinton and Keys, 2002; Clinton and Webber,2004). Depreciation and energy are combinedinto a machinery resource pool while wagesand salaries and factory supplies are re-namedas labour and indirect materials respectively.Unlike the ABC and TDABC models, aresource pool in a RCA-based costing modelcan have fixed and variable components at thesame time (van der Merwe and Keys, 2001;Benjamin and Simon, 2003; Krumwiede andSuessmair, 2007). In Department M’s case,labour and machinery resource pools consist ofboth fixed and variable components while theindirect materials resource pool has variablecomponent only.The fixed component of the labour resourcepool represents administrative salaries forDepartment M. Both the ABC and TDABCmodels require all resource pools to establishlinks to cost objects through activities at one ofthe four-levels (facility, product, batch andunit). Under ABC classification, administrationis a facility-level activity in Department M. Incontrast, the RCA model allows for the directallocation of resource costs from a resourcepool to a cost object without identifying anactivity between the two. As such,management can eliminate unnecessaryfacility-level activities in the costing model.Under the new RCA-based costing model, thefixed labour cost ($30,000) is allocated to thethree product lines directly. Consequently,the administrative activity is removed from themodel.The variable component of the labour resourcepool is allocated to assembly and qualitycontrol activities on the basis of unit cost of theresource ($9 per hour) and levels of resourceconsumptions (number of hours) in the twoactivities. Accordingly $63,540 is allocated toassembly activity and $1,386 is allocated toquality control activity.Allocations of machinery cost and indirectmaterial cost are done in a way similar to theone under the ABC-based costing model. Themachinery resource pool consists of both fixedand variable components. However, costs ofboth components are allocated to the sameactivity, assembly. As such, the fixedmachinery cost ($102,000) merely constitutesthe minimum amount of machinery costallocated to assembly activity. Its existencedoes not change the way that machinery cost isallocated to product lines.The outcomes of the RCA cost allocationprocess are presented in Tables 17-19. Similarto the ABC-based costing model, resourcecosts are allocated to product lines under atwo-stage process. In the first stage, allresource costs except for the fixed labour costare allocated to assembly and quality controlactivities. Fixed labour cost and activity costsare then allocated to the three product linesTable 17: Allocation of Resource Costs to Activities – RCA-Based Costing ModelResource Pool Assembly Quality ControlLabour $63,540.00 $1,386.00Machinery $162,350.00Indirect Materials $7,000.00 $496.00Total $232,890.00 $1,882.00Table 18: Allocation of Fixed Labour Cost and Activity Costs to Product Lines – RCA-BasedCosting ModelActivityCost per Activity Standard Deluxe PremiumDriverFixed Labour N/A $10,000.00 $10,000.00 $10,000.00Assembly $32.99 $130,629.52 $72,571.95 $29,688.53Quality Control $12.22 $537.71 $611.04 $733.25Total $141,167.23 $83,182.99 $40,421.7851

JAMAR Vol. 7 · Number 2 · 2009Table 19: Summary of Resource Costs Allocation – RCA-Based Costing ModelResource Pool Committed Cost Allocated Cost Cost of Idle ResourceLabour $100,000.00 $94,926.00 $5,074.00Machinery $170,000.00 $162,350.00 $7,650.00Indirect Materials $7,500.00 $7,496.00 $4.00with the same activity drivers under the ABCbasedcosting model. As shown in Table 19,idle resources are identified in all threeresource pools. However, costs of idleresources are significantly different under theTDABC-based costing model and the RCAbasedcosting model. The difference is causedby the way that the consumption of resourcesare recognised under the two models. In theTDABC-based costing model, theconsumption of resources are solely driven bytime spent on operating activities. In contrast,the consumption of resources under the RCAbasedcosting model is driven by multipledrivers. When the resources employed inoperations are heterogeneous, as in the case ofDepartment M, the RCA-based costing modelcan provide a better picture of the cost of idleresources.ConclusionThe TDABC and RCA models represent twodifferent philosophies on the development ofcost management systems. The TDABC modelis specifically designed to simplifyimplementation and maintenance of costmanagement systems through usages of singlemeasure of resources capacity and quantitybasedresource-activity cost drivers in themodel. Service organisations with largeproportions of human and IT resources andstandardised operating activities are likely tobenefit most from the model as time is anappropriate common measure of resources forthis type of organisations. In contrast, the RCAmodel attempts to capture complexities ofcontemporary manufacturing activities byrecognising complex inter-relationshipsbetween resource pools and cost objects andrelies on integration with ERP system tomanage complexities of the model. It is moresuitable to manufacturing organisations thatemploy multiple heterogeneous resources intheir operations.Despite the different philosophiesunderpinning the two models, the developmentof the TDABC and RCA models are stronglyinfluenced by the ABC model. It is notsurprising that some similarities do existbetween the two models. However, the keydifference is the recognition of idle resources;which is a common feature of the TDABC andRCA models, and which plays a key role in thetwo models. Recognition of idle resources inthe two models simplifies the development andmaintenance of the cost management system,and enables cost management systems thatadopted the two models to provide morerelevant and reliable cost information fordecision making.ReferencesAnderson, S.W., (2007), “Managing Costs andCost Structure throughout the Value Chain:Research on Strategic Cost Management”, InChapman, C. S., Hopwood, A.G., and Shield,M.D., Handbook of Management AccountingResearch, 2, Elsevier, Oxford, pp. 481-506.Baird, K. M., Harrison, G. L., and Reeve, R.C., (2004), “Adoption of Activity ManagementPractices: A Note on the Extent of Adoptionand the Influence of Organizational andCultural Factors”, Management AccountingResearch, 15(4), pp. 393-399.Baetge, J., Berndt, H., Bruns, H., von Colbe,W., Coenenberg, A., Korst, H., Lederle, H.,Metze, A., Ordelheide, D., Pfingsten, H.,Reinhard, H., Schnicke, C., Schwitters, J.,Seeberg, T., Siepe, G., Urban, P., Weber, H.,Weisműller, A., and v. Wysocki, K., (1995),“Working Group on External FinancialReporting of the Schmalenbach-Gesellschaft-Deutsche Gesellschaft fűr Betriebswirtschaft”,Accounting Horizons, 9(3), pp. 92-99.Barrett, R., (2005), “Time-Driven Costing: TheBottom Line on the New ABC”, BusinessPerformance Management, March, pp. 35-39.Benjamin, L. and Simon, T., (2003), “APlanning and Control Model Based on RCA52

JAMAR Vol. 7 · Number 2 · 2009Principles”, Cost Management, 17(4), pp. 20-27.Buchheit, S., (2003), “Reporting the Cost ofCapacity”, Accounting, Organizations andSociety, 28(6), 549-565.Buchheit, S., (2004), “Fixed Cost Magnitude,Fixed Cost Reporting Format, and CompetitivePricing Decisions: Some ExperimentalEvidence”, Contemporary AccountingResearch, 21(1), 1-24.Byrne, S., Stower, E., and Torry, P., (2009),“Is ABC Adoption a Success in Australia?”,Journal of Applied Management AccountingResearch, 7(1), pp. 37-52.Chenhall, R. and Langfield-Smith, K., (1998),“Adoption and Benefits of ManagementAccounting Practices: An Australian Study”,Management Accounting Research, 9(1), pp. 1-19.Clinton, B. D. and Keys, D. E., (2002),“Resource Consumption Accounting: The NextGeneration of Cost Management Systems”,Focus Magazine, 5, Retrieved August 19, 2009.http://www.focusmag.com/back_issues/issue_05/pages/rca.htmClinton, B. D. and Webber, S. A., (2004),“RCA at Clopay”, Strategic Finance, 84(4),pp.20-26.Cohen, S., Venieris, G., and Kaimenaki, E.,(2005), “ABC: Adopters, Supporters, Deniersand Unawares”, Managerial Auditing Journal,20(9), pp. 981-1000.Cooper, R., (1987), “Does Your CompanyNeed a New Cost System?”, Journal of CostManagement, 1(1), pp. 45-49.Cooper, R. and Kaplan, R. S., (1988) “MeasureCosts Right: Make the Right Decisions”,Harvard Business Review, 66(9), pp. 96-103.Cotton, W., Jackson, S., and Brown, R.,(2003), “Note on a New Zealand Replicationof the Innes et al. UK Activity-Based CostingSurvey”, Management Accounting Research,14(1), pp. 67-72.Drury, C., (1990) “Product Costing in the1990s”, Accountancy, May 1990, pp. 123-126.Friedl, G., Kűpper, H., and Pedell, B., (2005),“Relevance Added: Combining ABC withGerman Cost Accounting”, Strategic Finance,86(12), pp. 56-61.Gosselin, M., (1997), “The Effect of Strategyand Organizational Structure on the Adoptionand Implementation of Activity-BasedCosting”, Accounting, Organizations andSociety, 22(2), pp. 105-122.Horngren, C. T., (2004), “ManagementAccounting: Some Comments”, Journal ofManagement Accounting Research, 16, pp.207-211.Innes, J., Mitchel, F., and Sinclair, D., (2000),“Activity-Based Costing in the U.K.’s LargestCompanies: A Comparison of 1994 and 1999Survey Results”, Management AccountingResearch, 11(3), pp. 349-362.Kaplan, R. S. and Anderson, S. R., (2004),“Time-Driven Activity-Based Costing”,Harvard Business Review, 82(11), pp. 131-138.Kaplan, R. S. and Anderson, S. R., (2007),“The Innovation of Time-Driven Activity-Based Costing”, Cost Management, 21(2), pp.5-15.Kaplan, R. S. and Atkinson, A. A., (1998),Advanced Management Accounting, 3 rdedition, Prentice Hall, Upper Saddle River.Keys, D. E. and van der Merwe, A., (2001),“The Case for RCA: Excess and IdleCapacity”, Journal of Cost Management,15(4), pp. 21-32.Kiani, R. and Sangeladji, M., (2003), “AnEmpirical Study about the Use of theABC/ABM Models by Some of the Fortune500 Largest Industrial Corporations in theUSA”, Journal of American Academy ofBusiness, Cambridge, 3(1-2), pp. 174-182.Krumwiede, K. and Suessmair, A., (2007),“Getting Down to Specifics on RCA”,Strategic Finance, 88(12), pp. 50-55.53

JAMAR Vol. 7 · Number 2 · 2009McNair, C. J., (2007), “Beyond theBoundaries: Future Trends in CostManagement”, Cost Management, 21(1), pp.10-21.Pernot, E., Roodhooft, F., and van denAbbeele, A., (2007), “Time-Driven Activity-Based Costing for Inter-library Services: ACase study in a University”, Journal ofAcademic Librarianship, 33(5), pp. 551-560.Schildbach, T., (1997), “Cost Accounting inGermany”, Management Accounting Research,8(3), pp. 261-276.Sharman, P. A., (2003), “The Case forManagement Accounting”, Strategic Finance,85(4), pp. 43-47.Sprinkle, G. B., (2003), “Perspectives onExperimental Research in ManagerialAccounting”, Accounting, Organizations andSociety, 28(2-3), 287-318.van der Merwe, A. and Keys, D. E., (2001),“The Case for RCA: Decision Support in anAdvanced Cost Management System”, Journalof Cost Management, 15(6), pp. 23-32.van der Merwe, A. and Keys, D. E., (2002),“The Case for Resource ConsumptionAccounting”, Strategic Finance, 84(10), pp. 1-6.Webber, S. and Clinton, B. D., (2004),“Resource Consumption Accounting Applied:The Clopay Case”, Management AccountingQuarterly, 6(1), pp. 1-14.Weber, J. and Weibenberger, B. E., (1997),“Relative Einzelkosten- undDeckungsbeitragsrechnung: A CriticalEvaluation of Riebel’s Approach”,Management Accounting Research, 8(3), pp.277-298.54