Time-Driven Activity-Based Costing: a Microsoft Excel-Based Approach Appendix 7A

Learning Objective 6 Use time-driven activity-based costing to assign costs to cost objects.

Key Concepts Time-driven activity-based costing (TDABC) overcomes two important limitations that accompany the activity-based costing (ABC) model described in the main body of the chapter, in that TDABC: Does not require extensive interviews with employees. Does not require employees to self-report their own idle time. Helps companies estimate the financial impact of aligning capacity with demand.

Customer Cost Analysis: Baxter Battery – Revisited – Part 1 Baxter would like to improve its understanding of customer profitability and capacity utilization and will use TDABC to analyze its Customer Service Department labor costs. There are three major services provided to customer that require significant labor costs: Customer orders Design changes Customer assistance

Customer Cost Analysis: Baxter Battery – Revisited – Part 2 The Excel spreadsheet created summarizes three types of data inputs, shown on the next screen, for Baxter’s TDABC model: Resource data, which includes the number of employees in the department, the average salary, number of weeks in a year, the minutes available per week, and the practical capacity percentage. Activity data, which acknowledges that employees are not serving customers 100% of their available minutes. Cost object data, which includes the numbers of orders processed, customer queries, and credit reviews for three selected customers and for all customers.

Baxter Battery Data Input – Part 1   Baxter Battery Customer Service Department Resource Data: Number of employees 15 Average salary per employee $ 42300 Weeks per year 52 Minutes available per week 2,400 Practical capacity percentage 75% Activity Data: Customer Orders Design Changes Customer Assistance Minutes required per activity 30 90 80 Cost Object Data: Acme Auto Car World Auto Services All Customers Customer orders processed 20 24 59 10,000 Design changes 8 12 4,000 Customer assistance 10 11 2,000 40 hours ×60 minutes = 2,400 total

Baxter Battery Data Input – Part 2   Baxter Battery Customer Service Department Resource Data: Number of employees 15 Average salary per employee $ 42300 Weeks per year 52 Minutes available per week 2,400 Practical capacity percentage 75% Activity Data: Customer Orders Design Changes Customer Assistance Minutes required per activity 30 90 80 Cost Object Data: Acme Auto Car World Auto Services All Customers Customer orders processed 20 24 59 10,000 Design changes 8 12 4,000 Customer assistance 10 11 2,000

Baxter Battery Cost Analysis – Part 1 The type of cost assignments summarized on the next slides could be useful to Baxter Battery in larger initiatives, such as measuring customer profitability and managing its customer mix based on those insights. Furthermore, the cost assignments shown were performed without having to interview the 15 employees within the Customer Services Department. Instead, Baxter Battery only needed to make a reasonable estimate regarding its practical capacity percentage (75%) and to estimate the amount of time required to perform each activity one time in order to compute its time-driven activity rate.

Baxter Battery Cost Analysis – Part 2 52 weeks × 2,400 minutes per week × 75% = 93,600   Baxter Battery Customer Service Department Step 1: Calculate the cost per minute per resource applied: Number of employees (a) 15 Average salary per employee (b) $ 42,300 Total cost of resources supplied (a) x (b) 634,500 Practical capacity per employee (in minutes) (a) 93,600 Number of employees (b) Practical capacity of resource applied (in minutes) (a) x (b) 1,404,000 Cost per minute of the resource supplied 0.45 $634,500 ÷ 1,404,000 = $0.45

Baxter Battery Cost Analysis – Part 3   Baxter Battery Customer Service Department Step 1: Calculate the cost per minute per resource applied: Number of employees (a) 15 Average salary per employee (b) $ 42,300 Total cost of resources supplied (a) x (b) 634,500 Practical capacity per employee (in minutes) (a) 93,600 Number of employees (b) Practical capacity of resource applied (in minutes) (a) x (b) 1,404,000 Cost per minute of the resource supplied 0.45 Customer Design Step 2: Calculate the time-driven activity rate: Orders Changes Assistance Minutes per unit of activity (a) 30 90 80 Cost per minute of the resource supplied (b) Time-driven activity rate (a) x (b) 13.56 40.67 36.15

Baxter Battery Cost Analysis – Part 4   Baxter Battery Customer Service Department Step 1: Calculate the cost per minute per resource applied: Number of employees (a) 15 Average salary per employee (b) $ 42,300 Total cost of resources supplied (a) x (b) 634,500 Practical capacity per employee (in minutes) (a) 93,600 Number of employees (b) Practical capacity of resource applied (in minutes) (a) x (b) 1,404,000 Cost per minute of the resource supplied 0.45 Customer Design Step 2: Calculate the time-driven activity rate: Orders Changes Assistance Minutes per unit of activity (a) 30 90 80 Cost per minute of the resource supplied (b) Time-driven activity rate (a) x (b) 13.56 40.67 36.15 Step 3: Assign costs to cost objects: Acme Auto Car World Auto Services Number of orders processed (a) 20 24 59 Time-driven activity rate (b) Order processing time applied to (a) x (b) rounded 271.15 325.38 Number of design changes (a) 8 12 Design change time applied (a) x (b) rounded 488.08 610.1 Number of customer assistance (a) 10 11 Customer assistance time applied (a) x (b) rounded 361.54 397.69 542.31 Total customer service costs assigned 958.08 1,211.15 1,188.56

Use time-driven activity-based costing to analyze capacity. Learning Objective 7 Use time-driven activity-based costing to analyze capacity.

Baxter Battery Capacity Analysis – Part 1 The next slides show the four-step process that Baxter Battery uses for capacity management purposes. It focuses on all of Baxter’s customers rather than just the three customers we previously have identified.

Baxter Battery Capacity Analysis – Part 2

Baxter Battery Capacity Analysis – Part 3

Baxter Battery Capacity Analysis – Part 4 Would reduce expenses by working with six less employees. Reducing our current employees from 15 to 9.

Baxter Battery Capacity Analysis – Part 5 Cost savings will amount to $253,800

Baxter Battery “What-If” Analysis – Part 1 This last set of screens concludes our introduction to TDABC by showing how an Excel spreadsheet can be used to answer “what-if” questions about Baxter’s Service Department. The strengths of the entire methodology include (1) it is easy to update because it does not require employee interviews, (2) it quantifies unused capacity costs in an objective fashion that does not require employees to self-report their own idle time, and (3) it helps companies estimate the financial impact of aligning capacity with demand, particularly with respect to step-fixed resources such as the customer service employees in the Baxter Battery example.

Baxter Battery “What-If” Analysis – Part 2 What if employees are reduced from 15 to 9 . . . . . . and average salary reduced to $40.000?

Baxter Battery “What-If” Analysis – Part 3 New time-driven activity rate.

Baxter Battery “What-If” Analysis – Part 4   Baxter Battery Customer Service Department Step 1: Calculate the cost per minute per resource applied: Number of employees (a) 9 Average salary per employee (b) $ 40,000 Total cost of resources supplied (a) x (b) 360,000 Practical capacity per employee (in minutes) (a) 93,600 Number of employees (b) Practical capacity of resource applied (in minutes) (a) x (b) 842,400 Cost per minute of the resource supplied 0.43 Customer Design Step 2: Calculate the time-driven activity rate: Orders Changes Assistance Minutes per unit of activity (a) 30 90 80 Cost per minute of the resource supplied (b) Time-driven activity rate (a) x (b) 12.82 38.46 34.19 Step 3: Assign costs to cost objects: Acme Auto Car World Auto Services Number of orders processed (a) 20 24 59 Time-driven activity rate (b) Order processing time applied to (a) x (b) rounded 256.41 307.69 Number of design changes (a) 8 12 15 Design change time applied (a) x (b) rounded 461.54 576.92 Number of customer assistance (a) 10 11 Customer assistance time applied (a) x (b) rounded 341.88 376.07 512.82 Total customer service costs assigned 905.88 1,145.30 1,123.93 New customer service costs assigned.

End of Chapter 7A