Time-Driven ABC

A simplified variant of activity-based costing using the cost per unit of time for resource capacity and the time an activity takes, rather than activity surveys.

Source: Kaplan & Anderson 2004

Two estimates are required rather than a full activity survey. The first is the cost of supplying capacity for a unit of time, obtained by dividing the cost of a resource by the time it is practically available, which is normally less than the theoretical maximum. The second is the time each activity actually takes. Multiplying the two gives the cost of the activity, and summing across activities gives the cost of an episode. Costs then follow time consumed rather than being apportioned by survey. Practical capacity is normally estimated at a proportion of theoretical availability, allowing for breaks, training and administrative time, and that proportion should be stated since it scales every cost the model produces.

Source: Kaplan & Anderson 2004

Because conventional activity-based costing proved too burdensome to maintain. It required staff to be surveyed periodically about how their time divided between activities, and the resulting models became large, expensive to update and prone to drifting out of date as practice changed. Replacing the survey with two directly estimable quantities reduced the maintenance requirement substantially while retaining the principle that costs should follow what actually consumes them. The method also updates more readily, since a change in practice requires only the affected time estimates to be revised rather than the whole activity structure to be resurveyed.

Source: Kaplan & Anderson 2004

Unused capacity, which appears explicitly as the difference between the cost of capacity supplied and the cost of capacity consumed, rather than being buried in the cost of the work performed. Conventional absorption spreads the whole cost across whatever activity occurred, so a lightly used facility shows a high unit cost and gives no indication that the problem is utilisation rather than efficiency. Separating the two directs attention to the right question. This makes the method useful for capacity planning as well as costing, since the unused portion indicates how much additional activity could be absorbed before further investment is required.

Source: Kaplan & Porter 2011

In patient-level costing, where timestamps from theatre, imaging and pathology systems supply the durations the method needs without additional collection. It underpins work costing complete care pathways, where the objective is to establish what treating a condition actually consumes from first presentation to resolution. It is also used to compare the cost of delivering the same procedure in different settings, since it isolates time and rate rather than reporting a combined average. It also supports comparison between providers, since differences in time consumed and differences in the cost of capacity can be reported separately rather than combined into a single average.

Source: Kaplan & Porter 2011

Time is a good proxy for resource consumption where staff and equipment dominate and a poor one where consumables or drugs do, since those vary with the case rather than its duration. Estimating practical capacity requires a judgement about what proportion of available time is genuinely productive. And activities differing in intensity rather than duration are misdescribed, since two hours of routine work and two hours of complex work receive the same cost. Time estimates themselves are frequently obtained by observation of a small number of cases, so the precision of the resulting figures should not be overstated.

Source: Kaplan & Anderson 2004