Ensuring data accuracy. Estimates and assumptions about key cost drivers are problematic for anyone using ABC, but they are of particular concern for public companies that use the methodology to assign costs to business units, subsidiaries, and joint ventures in which profits are shared with another public company (for instance, publicly traded airlines' profit sharing on select routes). In the era of Sarbanes-Oxley, this means that an increasing number of ABC models are being audited and that any assignments which are either based on estimates or rarely updated may come under severe scrutiny.

To deliver an acceptable level of accuracy, time-driven ABC depends on robust and reliable data as much as any other methodology does. If the data comes from systems such as automated call-handling software and is regularly updated, then results will be accurate. However, if the information is out of date, or if it's based on estimates, the resulting cost information may include substantial errors. The difference between an estimate of four minutes and an estimate of four minutes eight seconds as the time required to handle an inbound telemarketing sales call may not seem large, but factored over 100,000 calls, it soon becomes significant.

Therefore, to be accurate, time-driven ABC requires as much data collection as does traditional ABC. Each time a model is refreshed and recalculated, the duration drivers should be updated. Even the most repetitive processes change. Call-center agents, for example, are frequently provided with new scripts in attempts to up-sell and cross-sell other products and services; such changes impact the length of each call. Collecting and collating data on cycle times means either regularly extracting the information from a transaction system or asking process owners to provide routine updates. Web-based ABC applications make such updates easy, and process management tools can expedite data collection.

Keeping the costing model up to date is difficult only when duration drivers are hard-coded into the software so that updates require IT intervention. This is important when shopping for software to support ABC: There is no valid reason for hard-coding cost drivers such as cycle times into the system, so look for applications in which updating all drivers is easy for the end user.

Inclusive Costing

Although the label "time-driven ABC" has come into use only recently, many would argue that the approach is not new. There are numerous instances in which ABC models use activity cycle times and transaction volumes to calculate costs. Lever Fabergé, the home- and personal-care division of multinational consumer goods giant Unilever, has incorporated time-driven calculations alongside more traditional ABC methodologies since 1997. Unable to reliably assign resource costs to activities such as shrink-wrapping pallets in its distribution centers, Lever Fabergé decided to calculate the cost of the activity by measuring the amount of time involved and multiplying that by the unit cost of warehouse staff. Similarly, rather than try to continually survey staff on how they spend their time, global bank HSBC has used standard cycle times for most of the activities carried out at the branch level for the past five years.

If asked, most ABC practitioners using such an approach would likely say they were using a "derived driver"; in other words, that they were combining two or more drivers (such as cycle time and transaction volume) to produce a third, derived driver, which they then used in assigning an activity cost to cost objects.

It is also important to note that "traditional ABC" and "time-driven ABC" are not mutually exclusive. An activity-based costing model does not have to use just one of these methodologies. In fact, time-driven ABC is not an appropriate methodology for all situations. In any organization, some functions -- such as marketing, legal, research, and areas of IT -- include activities that are far from homogeneous and repetitive. Trying to force a time-driven methodology onto activities in which cycle times vary wildly is inappropriate; for those activities, an alternative methodology should be used.

For that reason, most ABC models are likely to be hybrids, using a time-driven approach or derived drivers where those calculations work best and using the more traditional methodology elsewhere. Organizations intending to implement ABC should ensure that the software they select is flexible enough to accommodate all the various cost drivers that are appropriate for all their various divisions. As companies realize how the different ABC methods can fit comfortably side by side in today's diverse organizations -- and as software vendors rise to the occasion and produce software that supports both forms of the methodology -- interest in activity-based costing will inevitably continue to grow.

Richard Barrett is vice president of global marketing for ALG Software. He first became involved with ABC while working for DHL Worldwide in the late '80s, and his interest in the topic has continued ever since.