Analysis of Time-Driven Activity-Based Costing for Volkswagen

This report delves into the concept of Time-Driven Activity-Based Costing (TDABC), exploring its features and contrasting it with traditional and activity-based costing methods. It begins with an overview of the Volkswagen Group, its mission, marketing strategies, and technology. The report then defines TDABC, explaining its core principles, including the use of time equations and capacity cost rates. It highlights the advantages of TDABC, such as its ability to capture activity complexities and its cost-effectiveness. The report also outlines the differences between TDABC, traditional costing, and activity-based costing, emphasizing how TDABC assigns costs based on time drivers. Finally, the report assesses the suitability of TDABC for Volkswagen, considering the company's diverse departments and processes. The conclusion reinforces the effectiveness and appropriateness of TDABC for the company's operational needs.

RRU
Managerial Accounting

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Table of Contents
Introduction...........................................................................................................................................2
Background of Volkswagen Company................................................................................................2
Mission of Volkswagen Group.......................................................................................................3
Marketing Strategy of Volkswagen Group.....................................................................................3
Technology of Volkswagen Group.................................................................................................3
Overview of Time-Driven Activity-Based Costing...............................................................................4
Features of Time-Driven Activity-Based Costing............................................................................6
Differences between Time-Driven Activity-Based Costing, Traditional Costing, and Activity-Based
Costing...............................................................................................................................................7
Suitability of Time-Driven Activity-Based Costing for Volkswagen Company....................................8
Conclusion.............................................................................................................................................9
References...........................................................................................................................................10

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Introduction
The report is being prepared to identify the concept of Time-Driven Activity-Based Costing
and its features. Along with this, it will explain the difference between Time-Driven Activity-
Based Costing, Traditional Costing, and Activity-Based Costing. Further, the report will
assist Volkswagen Company a client of management consultancy firm in identifying whether
the Time-Driven Activity-based Costing is appropriate for their company's environment and
processes or not.
Background of Volkswagen Company
The Volkswagen AG is internationally known as Volkswagen Group. It is a German
company deal in the manufacturing of automotive automobiles and has it's headquartered in
Wolfsburg, Germany. Commercial and turbomachinery are designed and manufactured by
this company and along with this they also offer related services such as fleet management,
leasing, and financing. In 2016, the company overtake the Toyota Company and became the
largest automaker in the world by sales. For over two decades it has been successful in
maintaining Europe’s largest market share. In 2016, the company was declared as world's
second-biggest manufacturer vehicles in the automobile industry by the report of
Organization Internationale des Cosntructeurs d’Automobiles. According to the production
volume, the second biggest automobile manufacturer is Volkswagen Group, behind Toyota.
The passenger cars sold by Volkswagen Group under the Lamborgini, SEAT, Bentley,
Skoda, Audi, Volkswagen marques, Porsche, and Bugatti; marques MAN, Scania brand
under commercial vehicles and Ducati brand under motorcycles.

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Mission of Volkswagen Group
The mission of the group is to offer vehicles with safe, attractive and environmentally sound
features, which can survive in a competitive and tough market and set standards in the world.
Marketing Strategy of Volkswagen Group
The major focus of the company is towards increasing their core business by enhancing
productivity and decreasing production cost. In order to achieve following goals, the
company is concentrating on various strategies such as divestment of non-core segments, new
models introduction, and restructuring. The aim of the Volkswagen Group is to provide
products with good quality, safe environment, and enhanced productivity. The company has
adopted Double marketing strategy for the brand positioning. The meaning of Double
marketing is not spreading numerous messages in a single campaign, but various messages in
multiple campaigns are promoted parallel. The company who followed this strategy is Coke
due to the presence of high budget of marketing. In that campaign, various ads were
promoted at the same time but the outcomes of those campaigns were not positive.
The concentration of Volkswagen Group is on the easy obtainability of the vehicles for this
they have established 44 manufacturing sites in various countries of the world. Products
branding in different sections of manufacturing lines is the Volkswagen Group’s marketing
strategies.
Technology of Volkswagen Group
Blueprinting technology is used by Volkswagen Group which means the science of engine
reconstructing. In the blueprinting process balancing, carefully fitting, and measuring is being
performed which create an engine for performance enhancement. The Blueprinting process
involves setting all receiving the engine to its best value. The technologies which are used by

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the Volkswagen Group are environment-friendly and for this, they utilize recycled and
recyclable ingredients whenever possible. These strategies of the company help them in
increasing their market share, trust, and loyalty of the customers.
Overview of Time-Driven Activity-Based Costing
The time-Driven Activity-Based Costing method is implemented in order to overcome the
difficulties faced by the traditional ABC in changing the environment and to grab the full
activities complexity. Anderson and Kaplan are the developers of the new method or
approach for ABC and named it as Time-Driven Activity-based Costing. Under this
approach, time plays important role in distributing resources to the cost objects. Though
conservative ABC constantly had the dimension to make use of cost driver i.e. time, which
perform a different role in ABC’s new version. Traditional ABC method apply duration
drivers in the second stage of a cost allocation process, whereas the new approach uses the
time to drive costs directly from resources to cost objects, passing over the stage of first
assigning a department's resource costs to the multiple activities the department performs
(Janes and Succi, 2014). Therefore, with Time-Driven Activity-based costing, resources are
not allocated to particular activities; they are shared at a greater level. For every section or
procedure, costs of the resource are assigned directly to the cost objects with the help of two
estimates set and they are - the process time and cost per time unit. In place of cost per time
unit capacity cost rate can be used and process time can be calculated by time equation.
In this method, capacity cost rate is calculated first as overhead is divided by applied
capacity. The resources cost delivered to the operating department comprises of numerous
elements: employees, equipment, indirect labor, supervision, technology and equipment,
possession and other various indirect and support resources (Kaplan and Anderson, 2017).
The applied capacity which has been provided is the available time for creative work and can

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be acquired by eliminating inevitable ineptitudes from the hypothetical capacity; according to
the rule of thumb rule, it is normally expected to be 80 to 85 % of hypothetical capacity.
Though capacity is frequently measured in hours or minutes delivered, along with this it can
also be evaluated in other elements, such as gigabytes, weight or space. It must be noted that
the cost rate of the department is usable only if the resources mix delivered is almost same for
every action and deal executed within the section of the business.
If a department executes numerous procedures, each demanding various resources, then the
organization’s section must decompose operations of the department into more than two
processes and evaluate cost rate of separate capacity for every process (Kaplan and Anderson,
2007). As a final point, superior treatment is needed for the handling of resources seasonal or
peak capacity. More precisely, the slack period’s capacity cost should be the capacity that
will be essential if only the demand of the slack-period were to be achieved; the cost rate of
capacity in the peak months must be more costly and contain both the cost of delivering
capacity throughout the peak months along with the cost of capacity resources delivered, but
not needed, for the period of slack-demand.
Second, time equation is used in the Time-Driven Activity-based Costing in order to estimate
the usage of resources and cost of assigned resources to the activities which are performed
and processed transactions. A mathematical equation which states the required time in order
to perform a definite activity as a task of numerous time drivers, which can be distinct, dual
or continuous variables is known as Time equation (Namazi, 2016). For every transaction,
this type of time equation is utilized to define the required time to accomplish the activity.
Officially, the expected deal time based on k noticeable time drivers is stated as:
Tk = B0 + B1 X1 + …+ Bk Xk
with

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Tk = expected time for a specific transaction;
B0 = expected basic time, provided by the employees;
Bi = estimation of time of driver i, provided by the employees, with i= 1,….,k;
Xi = volume estimation of time driver i, as stated by the computer built information system of
the company, with i= 1,…,k. (Mitchell and Nørreklit, Jakobsen, 2013)
Features of Time-Driven Activity-Based Costing
 The Time-Driven Activity-based Costing method is very precise and gainful model
which is fast, low-cost, and easy to construct.
 Another feature of this method is a combination of the comprehensive transactional
data is obtainable from ERP and system of customer relationship management.
 It is a model which helps in recognizing opportunities for the procedure competencies
and capacity supervision.
 A model of costing is depending on the transactions precise of orders of individual,
procedures, customers and suppliers.
 Another feature of this method is predictions of the demands of resource, permitting
companies to budget for the needed capacity in order to handle the production and
sales assessments in their tactical plans (Weirich, 2017).
 Time-Driven Activity-based Costing is simply accessible across extremely varied and
multifaceted enterprises by accessible software presentations and database
technologies.
 It is a model which is easy and reasonable to update as variations arise in course
competencies and cost of the course.

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 It is considered as a common method for profitability and cost management which can
be utilized in all type of industries with difficulty in channels, processes, customers,
segments, and products, and huge expenditures for capital and people.
Differences between Time-Driven Activity-Based Costing, Traditional Costing, and
Activity-Based Costing
Time-Driven Activity-Based
Costing
Traditional Costing Activity-Based Costing
Time-Driven Activity-based
costing helps in recognizing
every department's capacity
and assigns the capacity cost
of the combined resources
over the cost object
established on the required
time to implement an
activity.
Traditional costing is the
factory overhead allocation
to products depending on the
production resources which
are consumed. In this
method, overhead is
frequently applied depending
on the number of hours
consumed of direct labor or
machine hours used
(Wilkinson, 2013).
Activity-based Costing
method which recognizes
actions in an organization
and allocates the cost of
every activity with all
services and products
resources according to the
definite consumption by each
(Coulter, McGrath and
Anthony, 2011).
Time-Driven Activity-based
Costing gives importance to
the time drivers for allocating
costs to services and
products.
Traditional Costing makes
use of distinct pool overhead
and is not capable to compute
the accurate cost (Hayden,
2017).
Activity-based costing gives
importance to cost drivers for
allocating costs to services
and products (Kaplan and
Anderson, 2006).
This method is less
expensive as compared to
This method invalids the
other important cost drivers
This method is very costly as
well as time-consuming to

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other methods and includes
all distinct features of
specific action into the one-
time equation, therefore
saving time.
that may add to the item’s
cost (Johnson, 2018).
sustain and appraise for new
circumstances in company's
exercise.
Time-Driven Activity-based
costing accordingly takes
into account the description
of the activity which affects
the costs (Marković and
Rakočević, 2014).
In traditional costing, the
production cost is determined
by the company after the
production of the product
(Jilani, 2018).
In Activity-based Costing,
the product's cost or value is
defined by the feedback of
the customer and range of the
pocket.
Suitability of Time-Driven Activity-Based Costing for Volkswagen Company
 The Volkswagen Company is consisting of various departments and units who
perform numerous task or activities in order to increase productivity and fulfill the
demand of their customers. Time-Driven Activity-based Costing is a new approach
which identifies the required time units to execute an activity, service or process.
 This method involves less expense on its installation and maintenance. The company
does not need to make extra expenses on this method.
 The distinctiveness of this method is that it makes use of time equation in order to
evaluate the time consumed on every activity.
 The Time-Driven Activity-based Costing implements multiple time driver methods
which will capture the difficulties of the Volkswagen Company in a better way (Gill,
2017).

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Conclusion
Time-Driven Activity-Based Costing is very effective and inexpensive as compared to other
methods of costing. The important aspect of this method is that it takes into account the most
important cost driver i.e. time. The above report has provided the detail description of the
Volkswagen Group along with the concept of Time-Driven Activity-based Costing and its
features. It has also explained the difference between Time-Driven Activity-based Costing,
Traditional Costing, and Activity-based Costing. Further, the report has also reflected the
reasons why Time-Driven Activity-based Costing method is suitable for Volkswagen Group.
Volkswagen is well-known and one of the leading automobile companies in the world, which
involve various process and activities in its business operations. Therefore, Time-Driven
Activity-based Costing is very beneficiary for this company.

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References
Mitchell, F., and Nørreklit, H., Jakobsen, M., 2013, The Routledge Companion to Cost
Management, Routledge.
Kaplan, R.S., and Anderson, S.R., 2017, Time-Driven Activity-Based Costing, Accessed on:
11 January 2018, Accessed from: https://hbr.org/2004/11/time-driven-activity-based-costing
Kaplan, R.S., and Anderson, S.R., 2006, Time-Driven Activity-Based Costing, Accessed on:
11 January 2018, Accessed from: https://hbswk.hbs.edu/item/time-driven-activity-based-
costing
Gill, S., 2017, Cost and Management Accounting: Fundamentals and its Applications, Vikas
Publishing House.
Janes, A., and Succi, G., 2014, Lean Software Development in Action, Springer.
Marković, A., and Rakočević, S.B., 2014, Proceedings of the xiv international symposium
symorg 2014: new business models and sustainable competitiveness, FON.
Kaplan, R.S. and Anderson, S.R., 2007, Time-Driven Activity-Based Costing: A Simpler and
More Powerful Path to Higher Profits, Harvard Business Press.
Hayden, A., 2017, Activity-Based vs. Traditional Costing, Accessed on: 11 January 2018,
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costing/
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2018, Accessed from:
http://www.differencebetween.net/business/finance-business-2/difference-between-abc-and-
traditional-costing/

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Johnson, R., 2018, Traditional Costing Vs. Activity-Based Costing, Accessed on: 11 January
2018, Accessed from: http://smallbusiness.chron.com/traditional-costing-vs-activitybased-
costing-33724.html
Wilkinson, J., 2013, Activity-based Costing (ABC) vs Traditional Costing, Accessed on: 11
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traditional-costing/
Namazi, M., 2016, Time-driven activity-based costing: Theory, applications and limitations,
Iranian Journal of Management Studies, 9(3), pp. 457-482.
Weirich, T., 2017, Why is Time-Driven Activity-Based Costing such a game changer?
Accessed on: 11 January 2018, Accessed from:
https://finance.toolbox.com/blogs/torstenweirich/why-is-time-driven-activity-based-costing-
such-a-game-changer-100110
Coulter, D., McGrath, G., and Anthony., 2011, Time-driven activity-based costing, Accessed
on: 11 January 2018, Accessed from: http://www.gaaaccounting.com/time-driven-activity-
based-costing/
Szychta, A., 2010, Time-Driven Activity-Based Costing in Service Industries, Accessed on:
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https://www.researchgate.net/publication/267373766_Time-Driven_Activity-
Based_Costing_in_Service_Industries