The Measurement and Management of Unused Capacity in a Time Driven Activity Based Costing System

Abstract:Companies rendering continuous 24 hours a day service may encounter difficulties in determining their unused capacity. In addressing this issue, managers can consider using a Time Driven Activity Based Costing (TDABC) System. In the measurement of unused capacity, managers should consider two new concepts, real and compulsory unused capacities. The aim of this paper is, to enhance the efficiency of the TDABC System by clarifying and explaining the real and compulsory unused capacities per shift.The principal result of the study is that the number of employees to be dismissed or directed to other productive areas should be determined on the basis of each shift, rather than considering the total amount of unused capacity in a day/month for the whole of the company. Finally, the study concludes that the management of unused capacity will only be effective when the real and compulsory unused capacities per shiftare considered.Keywords:Time Driven Activity Based CostingActivity Based Costing SystemUnused CapacityReal Unused CapacityCompulsory Unused Capacity(ProQuest: . denotes formulae omitted.)IntroductionIn the current global environment, businesses are exposed to rapidly increasing competition and are forced to enhance their competitive advantage in order to survive. As such, businesses must apply an effective cost management system. There is much evidence that the Traditional Cost System (TCS) can be considered a major obstacle to gaining a competitive advantage; due to the fact that this system produces inaccurate information about the costs of goods and services. This lead to the introduction of Activity Based Costing (ABC) and a simplified version of it called Time Driven Activity Based Costing (TDABC) (see Ratnatunga and Waldmann, 2010, and the literature quoted therein)TDABC was developed due to implementation difficulties encountered in ABC. Kaplan and Anderson (2007a) in proposing TDABC ensured an efficient cost system for businesses that was also easy to implement (Pernot, et al., 2007). Kaplan and Anderson (2007a) also claimed that this new cost system provides a significant competitive advantage to many companies. However, TDABC has some significant shortcomings. The measurement of time is still problematic. This is because, when direct observation is not possible, it uses the time estimations stated by operatives (Gervais et al., 2010). Another significant shortcoming, discussed in this paper, is that the TDABC has a significant issue regarding its interpretation of unused capacity, due to the uncertainty surrounding this capacity. Unused capacity is clearly a complicated concept; however, the uncertainty of unused capacity originates from the organisations' operations. Some types of organisation such as service organisations giving a 24-hour, 365-day service, are more problematic than others. This paper will focus on the uncertainty of the unused capacity itself rather than focusing on the types of organisation or organisations' operations.Eliminating a business's unused capacity is, in general, the best way for a manager to increase its efficiency. However, unused capacity can never be fully eliminated due to its special characteristics. This situation is most clearly seen in service companies rather than manufacturing ones. Unlike most manufacturing companies, service companies, such as hospitals, hotels, and certain restaurants, may render a 24 hours a day 7 days a week service. In view of the fact that services in such industries are produced and consumed simultaneously, the capacity utilisation of service companies directly depends on the demand of their customers. In addition, since demands cannot be inventoried (Balanchandran et al., 2007), eliminating the uncertainty of unused capacity becomes difficult for these types of companies.Therefore, the ultimate purpose of this paper is not only to minimise the uncertainty of unused capacity but also to enhance the efficiency of the TDABC system by clarifying and explaining the real and compulsory unused capacities per shift. …