A comparison of activity-based costing and time-driven activity-based costing

Abstract

Kaplan and Anderson (2004, 2007) developed time-driven activity-based costing (TDABC) to provide a costing system that is easier to update than activity-based costing (ABC). The relationship between ABC and TDABC, however, has not been systematically investigated. We compare the accuracy of the two systems in two complementary ways: analytically and via a numerical experiment. Our analytical comparison generates formulas that describe how each system maps resources to activities and finally to products. We demonstrate that ABC aggregates resource-to-activity information by activities, while TDABC aggregates by resources. Our numerical experiment shows that TDABC performs better than ABC when resources are more traceable to activities. ABC performs better than TDABC when activities are more traceable to products or when both resources and activities are more traceable to activities and products, respectively. If each type of traceability is equally likely, then ABC may be the more robust approach. Finally, we examine the ease of updating the systems and find that TDABC data collection costs will be prohibitive if the firm must collect information about each product’s use of subtasks.