Having survived the hype of the past two decades and proven its value many times over, activity-based costing (ABC) is back on the corporate agenda. After the initial burst of enthusiasm it enjoyed in the early 1990s, ABC came to be viewed as too time-consuming and laborious to be worth implementing. Collecting data that is not stored in any software system, such as the proportion of time a department's employees spend on various activities, can be particularly tedious. The ABC movement lost momentum as this negative perception spread, but today it is gaining new popularity.

Companies that have done ABC well have realized benefits that make the initiative worthwhile. Research by Accenture associate partner David Southiere ("CFO Project Volume 2," 2003) suggests that an ABC project's identification of opportunities for step changes typically reduces costs by between 3 percent and5 percent. His research also shows that ABC's ability to focus organizations on margin management and on growing profitable areas of the business can lead to revenue growth in the range of 5 percent to 15 percent.

As news about the potential savings spreads, activity-based costing has begun experiencing a resurgence in popularity. In their "Hype Cycle for Corporate Performance Management 2004," Gartner analysts Brian Wood, Frank Buytendijk, and Lee Geishecker note that "activity-based management has gained a great deal of momentum recently." They estimate that 20 percent to 50 percent of Global 1000 firms have already implemented some form of ABC. This is in line with the findings of a recent Business Finance survey, described in Where Are You on the ABC Learning Curve? in the December 2004 issue. Thirty-seven percent of respondents who work for companies with more than $1 billion in annual revenue said they have an established ABC program.

The growing list of success stories is not the only reason that increasing numbers of organizations are investing in activity-based costing. Another reason is that ABC projects tend to be more pragmatic than they were in the past. Today's initiatives focus on a smaller number of activities and on getting the right information to decision-makers at all levels of the business. The days of mindlessly following the methodologies set out in textbooks are over.

A third factor in the renewed interest in ABC is the advent of Web-based applications that eliminate much of the tedium involved in collecting and collating data that cannot be downloaded from a software system. These new applications enable users to refresh data in their models more frequently, and they enable managers to access reports from their desktop, then drill down into the data to better understand costs and profitability in their area of responsibility.

Finally, ABC is gaining some new attention because its founding father, professor Robert Kaplan, has revisited it. He has proposed a new methodology, which he calls "time-driven ABC," as an option for overcoming some of the downsides of traditional activity-based costing. Proponents of time-driven ABC suggest that it removes the need for time-consuming and costly surveys, and that it is more accurate than traditional ABC. Both of these claims are debatable, but at minimum, time-driven ABC provides one more alternative for diverse companies looking to maximize the benefits of an activity-based costing initiative.

Fundamentals of Time-Driven ABC

Typically in ABC programs, activity costs are assigned to cost objects using an activity driver such as the number of times the activity is performed. Suppose, for example, that a particular department within an organization performs two activities: It processes applications, and it chases late payments. As exhibit 1 demonstrates, a manager who knows how the department's staff spend their time and how they use the resources available to them can calculate the unit costs of processing an application and of chasing a late payment.

Time-driven ABC adds another input to the costing equation: the cycle time for each activity. In the example from exhibit 1, that means the time required to process an application or to chase a late payment. When a company approaches the calculation of activity-based costs with robust data on each activity's cycle time obtained from a transaction or processing system, it may be able to determine costs with more accuracy. Exhibit 2, below, shows the difference this can make.