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