Concept Architecture
Concept
Theoretically, Time-Driven Activity-Based Costing (TDABC) is a resource costing methodology that estimates the cost of supplying healthcare services by assigning resource costs according to the time required to perform each activity. It extends traditional activity-based costing by replacing multiple cost drivers with time equations and capacity cost rates, providing a simpler and more accurate representation of resource consumption. In health economics, TDABC is widely used to estimate patient-level costs, clinical pathway costs and healthcare process costs.
Mathematically, Time-Driven Activity-Based Costing is based on two parameters: the capacity cost rate of a resource and the time required to perform each activity. Total activity cost is calculated by multiplying the time consumed by the cost per unit of practical capacity. Time equations may be used to account for variations in patient complexity or service delivery.
In practice, TDABC is implemented by mapping clinical pathways, estimating the practical capacity of personnel and equipment, calculating capacity cost rates and measuring the time required for each process. The resulting patient-level cost estimates are used in economic evaluations, value-based healthcare, process improvement and resource allocation.
Purpose
Used to estimate the cost of healthcare services by measuring the time required for clinical activities and assigning resource costs according to practical capacity utilisation.
Mathematical Formulae
Primary Formula
Activity Cost = Capacity Cost Rate ? Time Required
where:
- Capacity Cost Rate = cost per unit of practical capacity (for example, � per minute)
- Time Required = time consumed by the activity
Supporting Formulae
Capacity Cost Rate:
Capacity Cost Rate = Total Resource Cost / Practical Capacity
Time equation:
T = ?? + ??X? + ??X? + ? + ??X?
where:
- T = estimated activity time
- X? = activity characteristics affecting processing time
- ?? = estimated time parameters
Related Mathematical Methods
- Activity-Based Costing
- Micro-Costing
- Process Mapping
- Cost Allocation
- Capacity Cost Analysis
Example
A specialist nurse costs �96,000 annually and provides 96,000 minutes of practical clinical capacity each year.
Capacity cost rate:
96,000 / 96,000 = �1.00 per minute
A patient consultation requires 35 minutes.
Activity Cost = 1.00 ? 35 = �35
The consultation cost assigned using TDABC is �35.
Excel Implementation
| Function | Example Formula | Health Economics Application |
|---|---|---|
| Division | =B2/C2 | Calculates the capacity cost rate from annual resource cost and practical capacity |
| Multiplication | =D2*E2 | Calculates activity cost from time required and capacity cost rate |
| SUM | =SUM(F2:F25) | Calculates the total cost of a patient's care pathway |
| SUMPRODUCT | =SUMPRODUCT(D2:D25,E2:E25) | Calculates total costs across multiple clinical activities |
VBA (Optional)
Automate patient-level TDABC calculations by importing process times, applying capacity cost rates and generating pathway costing reports.
Sources
- Kaplan RS, Anderson SR. Time-Driven Activity-Based Costing. Harvard Business Review. 2004.
- Kaplan RS, Porter ME. How to solve the cost crisis in health care. Harvard Business Review. 2011.
- Kaplan RS, Witkowski M, Abbott M, et al. Using Time-Driven Activity-Based Costing to identify value improvement opportunities in healthcare. Journal of Healthcare Management.
- Drummond MF, Sculpher MJ, Claxton K, Stoddart GL, Torrance GW. Methods for the Economic Evaluation of Health Care Programmes. Oxford University Press.
- Briggs A, Claxton K, Sculpher M. Decision Modelling for Health Economic Evaluation. Oxford University Press.
Related Concepts (2)
Library
Publications
1
Economic Analysis in Health Care — Morris, Devlin, Parkin & Spencer, 2nd Edition ed., 2012 (John Wiley & Sons)
A core textbook for advanced undergraduate and postgraduate health economics students, covering both the economics of health care systems and the evaluation of health care technologies, with international case studies and a strong balance of theory and application.
BookView source →
Frequently Asked Questions (6)
What is time-driven activity-based costing?
A costing method estimating a service's cost by multiplying the capacity cost rate of resources involved by the time required to complete each activity.
Source: Kaplan & Anderson 2004
How does time-driven activity-based costing estimate cost?
Time-driven activity-based costing estimates the cost of a service from two quantities: the cost per unit of time of the resources supplying capacity, and the time each activity requires of them. The capacity cost rate is found by dividing the cost of a resource by the practical capacity it can deliver, and the cost of an activity is that rate multiplied by the time it consumes. Summing across the resources a service uses gives its cost, built from measured times rather than from surveyed proportions of effort.
Source: Kaplan & Anderson 2004
What data does time-driven activity-based costing require?
The method requires the total cost of each resource group supplying capacity, an estimate of the practical capacity that resource can provide in a period, and the time each activity draws from it. Practical capacity is usually set below theoretical maximum to allow for breaks, maintenance and unused time. Time estimates come from observation, records or informed judgement, and can be expressed through equations where the time varies with characteristics of the case. Cost data are taken from the accounts of the department supplying the resource.
Source: Kaplan & Anderson 2004
How does time-driven activity-based costing differ from conventional activity-based costing?
Conventional activity-based costing assigns resource costs to activities using proportions of effort obtained by surveying staff, then assigns activity costs to outputs. Time-driven costing replaces the survey with a capacity cost rate and time estimates, which removes the need to interview staff about how they divide their time and makes the model easier to update as prices or times change. It also exposes the cost of unused capacity directly, since the capacity supplied and the capacity consumed are estimated separately rather than assumed equal.
Source: Kaplan & Anderson 2004
What are the limitations of time-driven activity-based costing?
The method depends on accurate estimates of practical capacity and of activity times, and error in either feeds directly into the costs it produces. Setting practical capacity involves judgement, and time equations can grow complex where activities vary widely between cases. Obtaining reliable times may require observation that is itself costly. The approach also captures the resources whose time is modelled, so costs not driven by time, such as consumables, have to be added separately rather than emerging from the time calculation.
Source: Horngren, Datar & Rajan 2015
Where is time-driven activity-based costing used in healthcare?
It is applied where the cost of a specific care process is needed at a finer level than average figures provide, such as costing a surgical pathway, an outpatient episode or a diagnostic procedure. By attaching cost to the time each staff group and facility contributes, it can show where cost accumulates along a pathway and where capacity is used inefficiently. This supports comparison between ways of delivering the same service and informs decisions about how the resources along a pathway are organised.
Source: Kaplan & Anderson 2004
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British health economist
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Verification date: 8 Aug 2025
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