SUITABILITY OF TDABC IN FABTRONICS

Explore the suitability of Time-Driven Activity-Based Costing (TDABC) for Fabtronics, a leading electronics manufacturing company. Learn about TDABC features, differences from traditional costing systems, and its benefits for Fabtronics.

MANAGERIAL
ACCOUNTING
SUITABLITY OF TDABC IN FABTRONICS

Table of Contents
INTRODUCTION......................................................................................................................................2
DESCRIPTION OF THE CLIENT’S COMPANY...................................................................................3
TDABC (Time-Driven Activity-Based Costing) AND ITS FEATURES...............................................4
THE DIFFERENCE BETWEEN TDABC AND ACTIVITY-BASED COSTING AND OTHER
TRADITIONAL COSTING SYSTEM......................................................................................................6
SUITABILITY CHECK OF TDABC FOR FABTRONICS.....................................................................9
CONCLUSION AND RECOMMENDATIONS.....................................................................................11
REFERENCES........................................................................................................................................12
1

INTRODUCTION
The term Costing is applied in the business organization’s accounting policy as a
method of identification of the cost of production and manufacturing of a product with
respect to the income generated by that product. The systems of costing figure out the
overhead of manufacturing and then allocate the determined overhead expenses to the
products of the organizations. There are various methods of Costing which includes the
traditional, Activity Based Costing (ABC) and Time-Driven Activity-Based Costing
(TDABC) systems. The assignment focuses on determining the suitability of TDABC for
an electronic manufacturing company, Fabtronics in which a report is prepared by a
graduate consultant of a management consultancy firm for the same. The assessment
will include the brief description of the chosen organization, Fabtronics along with the
introduction to TDABC and its features. Also, the difference between the traditional
costing methods and ABC and TDABC along with a final evaluation of whether TDABC
is suitable for Fabtronics.
2

DESCRIPTION OF THE CLIENT’S COMPANY
The organization, Fabtronics is a world-class electronics manufacturing firm established
in the year 2003. The company was founded by Frank Harris and Rod Briggs who have
more than 25 years of experience in the electronics appliance manufacture industry
(Fabtronics, 2018). The company has expanded its roots in the Australian market and
has become the leading electronics manufacturing company in the country. The
company leads in manufacturing PCB electronics and the circuit boards and other
electronic components. The organization is based in Braeside, Victoria in Australia. The
firm has ISO certification has expertise in delivering high-quality electronic components
and products such as combustion control, communication and display technology
products.
Figure 1
Source: [https://electronicsnews.com.au/company/fabtronics/]
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TDABC (Time-Driven Activity-Based Costing) AND ITS
FEATURES
The concept of Time-Driven Activity-Based Costing or as popularly called TDABC was
devised by Kaplan and Anderson and emerged as an enhanced version of the old ABC
model. It shows the relation of the measurement of cost to time. This methodology helps
and benefits the firms to measure the cost of products and their productivity. It is a
management technique which provides the complete information about the cost-to-
serve ratio and the productivity for the products and services and the customers of the
company (Perkins and Stovall, 2011). The procedure involved in TDABC is decided on
the basis of some factors such as the expenses to provide the resource capacity for
each of the business procedure and the time with respect to resource capacity which is
required to carry out the work.
The TDABC model is very beneficial for the organizations where there is need of
measuring the business cost associated with the resources with respect to the time
taken in the production process. The model mainly focuses on time management and is
based solely on the concepts which are: maintaining the usage f the time allocated for
carrying out various tasks involved in the different processes of the organization and the
cost which is required for the availability of resources for carrying out the manufacturing
operations in the company.
The features and benefits of TDABC model are as follows-
 The model is easy to estimate and install and is feasible to update to reflect the
modifications in the procedures, the cost of resources and the ordered variety.
 The data in the model can be fetched from the ERP (Enterprise Resource
Planning) and CRM (customer relationship management) systems (Öker and
Adıgüzel, 2016)
 The validation of TDABC can take place through direct observation of the
estimate of the model
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 The model is easy to scale and is capable of handling millions of transactions
and also delivers the services at a fast rate and performs real-time reporting.
 The model has the feature of displaying explicitly the capacity of resources and
gives emphasis on the resources that are not used for facilitating the
management actions
 The model successfully uses the time equations to include variations in the
orders and behaviour of customers without escalating the complexity of model
 Fabtronics if adopts the techniques of TDABC gets the benefit through price
reduction and rise in the productivity of the manufacturing firms which therefore
helps the management of the company to make strategy related to financial
measures. This will facilitate the planning of budget for manufacturing process
simultaneously and will result in the creation of consolidating financial report of
the company.
 The model will provide cost transparency in the company as it allows the
management to gather information associated with the cost utilization in the
various activities of different departments and which will produce low
consumption of cost and preserving the economic resources and will be able to
display the overall resource utilization and expenses which will be transparent to
all the departments (Gervais, et al. 2010).
 The model of TDABC has the property associated with it which will assist the firm
in the allocation of monetary and non-financial resources for manufacturing and
other activities to various departments which will help in estimation of the overall
consumption of the resources and keep the unused resources for future use.
This will also provide benefit in designing the budget for the resources and
implantation of various processes in the company (Kaplan and Anderson, 2004).
 The feature of shared services helps the company to preserve time which is
made possible as a result of the elimination of duplicity of information and the
reduction in the overflow of processes which is facilitated through the allocation
of resources to various departments of the firm and allocation of time on propriety
basis.
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6

THE DIFFERENCE BETWEEN TDABC AND ACTIVITY-BASED
COSTING AND OTHER TRADITIONAL COSTING SYSTEM
In the earlier times, the firms used the traditional methods of costing which distribution
of costs various activities were based on the distribution according to the average
overhead rates. The traditional methods collected all the indirect expenses involved in
the production process and then applied the costs equally on the panel with the help of
a specific driver such as the machine hours. With the advancement in technology, the
firms then moved towards more sophisticated methods of costing which gave the rise to
Activity Based Costing or also called the ABC systems (Plank, 2018). The ABC systems
firstly identified the activities associated with the production process and then assigns
specific costs to the execution of processes and then finally estimate the cost of the
product.
Figure 2: TDABC and customer benefit
Source: [https://twitter.com/datalumen_sci/status/688468269687267328]
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The ABC systems help the companies to manage the resources and funds in an
efficient manner and gain valuable visions and factual benefits which are related to the
financial resources. This also gives assistance to the firms to approximate the returns
on the financial investment and the profit on the sales which ultimately results in
anticipating the demands of the consumers that was not probable in earlier times in the
traditional costing systems. The business firms implemented the ABC systems in the
1980's which benefitted the management and assisted them to get an idea about the
cost of products is involved in the production process (Kont and Jantson, 2011). The
product cost estimation is efficient and enhances the work and productivity of the
organisation and helps in the decision making a procedure which is directly related to
the costing and in maintaining the relations between the client and the company.
The ABC systems in spite of giving assistance for gathering the data and related
information to the management of the company but due to some technical and faults in
the efficient synchronisation between the management may lead to several problems.
Also, the traditional costing systems are found to be very much expensive for the
manufacturing firms which makes them difficult and rare to implement it and also the
ABC systems have a drawback which makes the system difficult to handle for the
employees and also intangible when there is a need of a change in the system.
Figure 3
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Source: [http://mgmtys.blogspot.in/2012/03/activity-based-costing.html]
The issues related to the ABC model encouraged the model developers to devise a new
model known as TDABC which is the Time Driven Activity Based Costing. This model
saves the expenses as well as the time of the companies in their manufacturing
procedure. The TDABC model differs from the traditional systems and ABC in the
following ways:
The TDABC model eliminates the time required for the various processes involved in
the production in the business firms. The TDABC estimates precisely the time which is
easily identifiable and can be maintained based on the absolute analysis and
assessment of the processes (Carmo and Padovani, 2012). Whereas in the ABC and
traditional models the estimation of time was not precisely done.
The model gives assistance to the companies to handle the financial records of the
firms in an accurate manner to gather the information about the issues involved in the
business deals related to the utilisation of time-related equations. These time driven
equations correctly estimate the required time for the processes and eliminate
redundant time taken for duplicate processes and also reduces the efforts of tracking
the processes and costs involved in a synchronised manner.
The TDBAC over the traditional models helps and benefits in reduction of the time taken
for mixing the data which the assistance of the data which is acquired from the ERP
systems
In the traditional and ABC models the data which was acquired was not accurate and
precise but in TDABC the data which is gained is exact and correct. The accuracy level
varies but this system provides immense benefit to assigning the available resources for
various tasks in an organised and cost-effective manner (Plank, 2018). Also, the future
cost can be estimated which will be required for the production process in the
manufacturing firms and thereby conduct the effective planning according to the
estimated cost.
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The TDABC system can be easily implemented by the Fabtronics which has a medium
business size and is an electronics manufacturing firm with the assistance of the ERP
and CRM systems which will help the company management to assign the costs for the
production of the products in an effective manner.
SUITABILITY CHECK OF TDABC FOR FABTRONICS
The leading electronics manufacturing company, Fabtronics is expert in dealing with the
electronics components and products such as motor control, power supply, display
technologies which involves LED and LCD, chemical measurement and dosing,
technological equipment for combustion control, Lighting products which include the
LED lights, the electronic controls which saves power and help in maintenance of
temperature and to encourage awareness about the power saving products. The
processes which are carried out in Fabtronics can easily adapt to TDABC system in
their respective departments are: Concept building for a potential product, the design
development and its execution, building prototypes of the products and fulfilling the
EMC requirements by conducting the emission tests, Research and development of the
technologies, check for safety compliance and safety check for meeting the SAI global
certifications, the manufacturing process (Kaplan, 2014). All these processes are
conducted in the departments of manufacturing, R&D, Testing, designing, planning and
the management. All the departments and processes need the TDABC model to serve
its clients in a better manner and expect more effective results.
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Figure 4
Source: [http://sfmagazine.com/post-entry/february-2016-time-driven-or-driver-
rate-based-abc/]
The TDABC will benefit Fabtronics to save its expenses and time which earlier took
ample time for the execution of their respective processes and also decide its resource
distribution and to handle the complex financial accounting processes involved with the
transactions and financial management in an organised manner by the use of effective
time equations. The ERP and CRM systems can be used in TDABC systems to
efficiently fetch the data involved with the management of resources and cost (Ruiz-de-
Arbulo-Lopez, et al. 2013).
Also, the TDABC model implementation if Fabtronics will help the company to inspect
the two cost centres which are Domestic order Processing and customer service
department of which the first one is based on orders and the later one with the customer
satisfaction. In short, TDABC is suitable for Fabtronics as it helps to effectively estimate
the time and cost involved in the manufacturing process and also reduces the
complexity of the tasks.
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CONCLUSION AND RECOMMENDATIONS
The costing methods used in earlier times are not cost efficient and take more time for
execution. The conclusion can be withdrawn from the above assessment of the TDABC
and its features that this model is suitable for Fabtronics which can be efficiently
implemented and will help the firm to save its cost and time and make efficient use of
the available resources and also to estimate the future use of the resources and costs.
The TDABC model can be recommended for the company for implementation in the
various processes of manufacturing and thereby save the resources and manage the
time.
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REFERENCES
1. Carmo, L.P.F. and Padovani, F., 2012. Advances and challenges for adoption of
activity based costing (ABC) by public sector: a comparative study of Brazil,
Colombia, Uruguay and United States. International Business Research, 5(2),
p.150.
2. Fabtronics, 2018. [Online available at: http://www.fabtronics.com.au/ last
accessed on : 8th January 2018]
3. Gervais, M., Levant, Y. and Ducrocq, C., 2010. Time-driven activity-based
costing (TDABC): An initial appraisal through a longitudinal case study. Journal
of Applied Management Accounting Research, 8(2), p.1.
4. Kaplan R.S., Anderson S. R., 2004, Time-Driven Activity-Based Costing. [Online
available at: https://hbr.org/2004/11/time-driven-activity-based-costing, last
accessed on: 6th January 2018]
5. Kaplan, R.S., 2014. Improving value with TDABC. Healthcare Financial
Management, 68(6), pp.76-84.
6. Kont, K.R. and Jantson, S., 2011. Activity-based costing (ABC) and time-driven
activity-based costing (TDABC): applicable methods for university libraries?.
Evidence Based Library and Information Practice, 6(4), pp.107-119.
7. Öker, F. and Adıgüzel, H., 2016. Time‐driven activity‐based costing: An
implementation in a manufacturing company. Journal of Corporate Accounting &
Finance, 27(3), pp.39-56.
8. Perkins, D. and Stovall, O.S., 2011. Resource Consumption Accounting-Where
Does It Fit?. Journal of Applied Business Research, 27(5), p.41.
9. Plank, P., 2018. Introduction. In Price and Product-Mix Decisions Under Different
Cost Systems (pp. 1-5). Springer Gabler, Wiesbaden.
10. Ruiz-de-Arbulo-Lopez, P., Fortuny-Santos, J. and Cuatrecasas-Arbós, L., 2013.
Lean manufacturing: costing the value stream. Industrial Management & Data
Systems, 113(5), pp.647-668.
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