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Open Access
Research article

An Application of Time-Driven Activity Based Costing Method in the Mold Manufacturing Industry

ender boyar1,
mehmet basti2
1
Houston, USA
2
Cestar College, M5E 1W7 Toronto, Canada
Journal of Accounting, Finance and Auditing Studies
|
Volume 7, Issue 3, 2021
|
Pages 260-280
Received: 05-17-2021,
Revised: 06-11-2021,
Accepted: 06-19-2021,
Available online: 09-29-2021
View Full Article|Download PDF

Abstract:

Purpose: The purpose of this study is to analyze in detail one of the new cost approaches, time driven activity-based costing (TDABC), and in this context the cost of a mold manufacturing company is analyzed.

Methodology: For this research, we used primary and secondary sources. Direct observation, interviews with relevant departments and computer analysis methods were used as data collection method. A software and online database especially developed for the project was used in order to ease data collection.

Findings: Different than traditional volume-based cost methods, with TDABC, based on data analysis, we have identified idle capacities for each department. Which means, TDABC method can be used as an effective management tool as well as for financial reporting purposes.

Originality/Value: This paper aims to provide empirical evidence in the implementation of TDABC in project-based manufacturing industry, especially in mold sector and give a contribution to researchers in this field.

Keywords: Cost, Activity Based Costing, Time-Driven Activity Based Costing
JEL Classification: M41

1. Introduction

Control and management of costs in enterprises has gained much more importance today compared to the past, due to the increase in competition. For this reason, enterprises are making more efforts to choose a cost management method suitable for their production systems to manage their costs more effectively. Activity Based Costing (ABC), which is a very common option in this regard, has provided important advances in terms of cost control and management by focusing on activities as a cost driver in the distribution of indirect expenses. ABC has a two-stage distribution structure which accepts that activities consume resources and cost elements consume activities.

Over time, the ABC method has been criticized for various reasons such as measurement errors, high installation and update costs. Time-Driven Activity Based Costing (TDABC) method appears as a method developed in order to provide solutions to these criticisms. TDABC method stands out with its ease, especially in terms of capacity control while preserving the basic features of the ABC method. The most important feature of the TDABC method is that it uses time equations as a management tool.

The main goal of this study is to reveal the advantages and disadvantages of TDABC by comparing the results obtained of applying TDABC method to the enterprises that conduct order or project-based production with the traditional method. In the literature on this subject, studies on companies conducting mass production or having standard processes in the service industry are found in general. For this purpose, TDABC method was applied on a company producing pipe fitting molds for plastics industry. With this study, it will be better revealed how the application of TDABC in an industrial enterprise that conducts order-based production affects capacity utilization and production costs.

2. Time-Driven Activity Based Costing

Enterprises discovered ways to both increase profitability and manage costs more effectively in ABC applications especially during 90s, and gained highly significant benefits with this way (Yilmaz and Baral, 2007: 3).

Emergence of certain deficiencies of the traditional ABC method over time has caused many enterprises to abandon this method or start to apply it at a limited level (Kaplan, 2005: 13). In particular, reasons such as application and update difficulty, causing increase in costs, dissatisfaction of employees, difficulties in capacity calculation and inconsistent results have led enterprises to stop using the ABC method (Kaplan and Anderson, 2005: 131-132).

TDABC method has been developed in response to abovementioned criticism and needs. It is especially emphasized that it has been developed by taking the benefits obtained from ABC into consideration. TDABC method stands out with its easy and fast application, easy integration with systems such as ERP and CRM, its advantages in terms of sustainability and cost, and its rapid update abilities. Its ability to predict orders and resource demands more transparently in terms of modeling, efficiency and capacity utilization operability is also considered among other features (Kaplan and Anderson, 2003: 15-16).

It is thought that TDABC method takes time as the basic measure in the performance of activities, produces more effective information in terms of management since it does not include the empty capacity in the cost calculation (Özyürek and Dinç, 2014: 350).

3. Method of The Research

The application was carried out at a private enterprise in Istanbul, Turkey, producing molds for plastic industry. The company produces plastic pipe fittings and electrical material molds. The company carries out order-based production and a total of 13 workers are employed by the company’s production department.

Purpose of this study is to compare the results of application of TDABC method in this enterprise carrying out order-based production with volume-based costing method which is currently used by the enterprise. Cost information for raw material and conversion (workmanship and general production expenses) required for the operation was obtained from the accounting department. Order-based cost information was obtained from the planning department. TDABC application in the operation was performed by based on conversion costs. Raw material cost was considered in calculation of total order cost. The application includes the actual data for January – March 2016, and the company has performed the production of 32 mold orders in this time period. Direct observation, interviews with relevant departments and computer analysis methods were used as data collection methods. A software and online database specifically developed within the scope of the project was used in order to ease data collection.

4. Application

In the study, following 6-stage procedure was used in TDABC for the company carrying out mold production for plastic industry (Everaert and Bruggeman, 2017: 17).

  • Determination of resource groups

  • Determination of costs belonging to resource groups

  • Determination of practical capacity of each resource group

  • Calculation of capacity cost rate for each resource group

  • Determination of costs assigned to each resource group

  • Calculation of total costs assigned to resource groups

4.1 Determination of Resource Groups

As a result of observations and interviews, it has been determined that production department of the enterprise consisted of five resource groups as Planning, CNC, Other Machining Processes, Assembly and Delivery. These resource groups are to be called as departments and their main activities are shown in the table below.

Table 1. Resource groups of the enterprise and their activities

Resource Groups

Production Processes

Planning

CAD Programming

CAM Programming

CNC

CNC Processing

CNC Lathe

Other Machining

Processes

Borwerk Cutter

Manual Lathe

Erosion

Peck Drilling

Process

Assembly

Mold Lapping

Mold Assembly

Delivery

Test Process

Painting

Packing

4.2 Determination of Costs Belonging to Resource Groups

When determining expense types of the enterprise, data for January-March 2016 period was obtained from the accounting department. In the study, conversion costs were analyzed, costs other than raw material and production were not taken into consideration. Following table shows direct workmanship and general production expenses (conversion costs) other than direct raw material and articles as well as the cost drivers determined by us.

Table 2. Conversion costs and cost drivers

Actual Conversion Costs

Amount (TRY)

Cost Share

Cost Driver

Personnel Wage

103,935

30.6%

Direct

SSI Employer Share

21,930

6.5%

Direct

SSI Employee Unemployment

2,027

0.6%

Direct

Notice Pay

1,110

0.3%

Direct

Operation Costs

22,704

6.7%

In Proportion Among

Departments Used

Repair and Maintenance Expenses

12,238

3.6%

Equal Among Departments

Using Machines

Workmanship, Cutting, Marking, Trial

Expenses

32,264

9.5%

Number of Order

Electricity Expenses

6,584

1.9%

Number of Machines

Food and Kitchen Expenses

9,394

2.8%

Number of Personnel

Shipment and Cargo Expenses

2,490

0.7%

Equal Among Departments

Personnel Transportation Expenses

12,435

3.7%

Number of Personnel

Rent Expenses

60,000

17.6%

m2

Work Clothes and Component Expenses

1,488

0.4%

Number of Personnel

Machinery Amortization Expenses

33,900

10.0%

Direct

Fixture Amortization Expenses

433

0.1%

Direct

Vehicle Amortization Expenses

13,734

4.0%

Equal Among Departments

Various Expenses

3,314

1.0%

Equal Among Departments

339,980

100.0%

Conversion costs of January-March period of the enterprise were distributed to relevant departments via the distribution keys determined above. When distribution keys are determined, the departments where cost is created were taken into consideration. For instance, personnel expenses were directly distributed taking into consideration the wages of personnel working at the relevant department while m2 measurement was preferred for rent expenses. Table 3 shows the expense shares of the production department.

Table 3. Costs of resource groups after distribution of conversion costs

Resource Groups

Conversion Costs (TRY)

Planning

60,439

CNC

114,409

Other Machining Processes

56,343

Assembly

76,464

Delivery

32,324

339,980

4.3 Determination of Practical Capacity for Each Resource Group

Practical capacity is the production amount realized under the design capacity (design capacity is defined as the highest level of production amount expected to be realized under ideal conditions determined during design stage of the system) due to current environmental conditions and various disruptions occurred during the production (Kobu, 2008: 243-244). When practical capacity is determined, different capacity scales such as number of workers, machine operation hours for each resource group can be used. In this study, it was deemed suitable to use number of (mold) workers since the enterprise subject to the application conducted activities in a labour-intensive industry. When calculation is performed, practical capacity was calculated based on the theoretical capacity that is daily working hours of workers. In the enterprise of application, daily working hours is 9 and there is 1 hour of lunch break and two tea breaks, each lasting 15 minutes. In the light of these information and considering other needs of workers and quality of the work, it was deemed suitable to consider practical working hours 7 hours a day.

4.4 Determination of Capacity Cost Rate for Each Resource Group of the Enterprise

Number of worked days for January-March period of 2015 were calculated as 63. When capacity-cost rate was determined, total cost of each resource group is divided to practical capacity (Kaplan and Anderson, 2007:6). Following table calculates capacity-cost rates separately for each resource group.

Table 4. Capacity cost rates of production resource groups

Departments

Number of

Personnel

Practical Capacity

(Hours) (63x7)

Total Practical

Capacity (Hours)

Total Expense

Share (TRY)

Capacity Cost-Rate

(TRY/Hour)

Planning

4

441

1,764

60,439

34.26

CNC

4

441

1,764

114,409

64.86

Other

Machining

1

441

441

56,343

127.76

Assembly

3

441

1,323

76,464

57.80

Delivery

1

441

441

32,324

73.30

Total

13

5,733

4.5 Determination of Costs Assigned to Each Resource Group of the Enterprise

TDABC method uses “time equations” to determine capacity utilizations of orders. These equations are created by combining various different activities. It has been accepted that these are important and beneficial tools for revealing the duration of production process. It is quite easy for enterprises to clearly determine their production processes to prepare these equations (Kaplan and Anderson, 2007:34). With this feature, TDABC method differs from traditional ABC method. Updating the process and duration is easy thanks to the interventions to be made on the equation. Creation of time equations for industries making order-based production as in this study such as mold industry is a little more difficult compared to enterprises making standard production. Each new order being different from each other requires developing special time equations for each order. It is especially important to identify the factors affecting time in work analysis.

In the equation given below, the time required to carry out (k) event of (j) activity is explained by (x) drivers in (p) time. (Bruggeman et al., 2005: 12-13; Everaert and Bruggeman, 2007: 17)

tjk = β0 + β1x1 + β2x2 + … + βpxp

According to features of activities of a production process, the total duration consumed (tjk) is expressed with functions involving time drivers’ variables.

β0 means a constant time and is independent from activity features.

β1 shows the increase in duration for one unit of increase in x1. Parameters in the equation are explained as follows.

tjk = the duration required to carry out (k) event of (j) activity,

β0 = constant duration required for (j) activity,

β1 = duration consumed for one unit of time factor no.1 when x2, x3, x4, … xp is constant,

x1 = time factor 1, x2 = time factor 2, …, xn = time factor n

P = number of time factors used to determine the duration required for (j) activity performed.

Let us assume that order process is based on three-time drivers as customer type (old/new), number of data entries (number of request entries) and order type (normal/urgent). With the assumption that basic order information entry takes 5 minutes, each data entry requires 3 minutes and also new customer information entry requires 20 minutes, and additional 7 minutes are required if the order is urgent;

Processing duration per order = 5 + 3x1 + 20x2 + 7x3

x1 = Order processing (request entry) number,

x2 = (0) for available customer and (1) for new customer,

x3 = (0) for normal order and (1) for urgent order.

Therefore, order processing time required in the event of 5 urgent orders for a new customer would be (tjk) = 5 + 3x5 + 20x1 + 7x1 = 47 minutes.

After determination of amounts of time drivers, amounts of time drivers are put in the time equation in order to find the total durations requested for each resource group. Afterwards, the duration required for each resource group is multiplied by capacity-cost rate to calculate the costs assigned to orders from resource groups.

Application stages of this process exemplified above in our study are shown below. Definition of a mold, determination of its production processes and determination of factors causing difference in terms of time in the production process is important in terms of time equations in mold production.

Based on observations and interviews, factors affecting production process of a mold are listed below. It was coded as time factor similar to the example given above to be used in time equations.

x1 = The fact that the mold was produced previously

x2 = Modification requirement of the mold

x3 = Mold complexity coefficient (difficulty level 1-5)

x4 = Number of mold mesh

x5 = Surface area of the mold

x6 = Borwerk process requirement of the mold

x7 = Hot runner technology utilization on the mold

x8 = Number of tests conducted on the mold

x9 = Painting of the mold

Durations required to create time equations of the mold order and amounts of drivers required for each process were determined considering the factors listed above. Activities such as heat treatment, sanding, chromium plating performed by contractor outside the enterprise were not included in the process.

Time equation of planning department

Activities required to create time equations at planning department and their durations are shown below.

Table 5. Planning department processes and time drivers

Processes

Sub-Processes

Process Activities

Time Drivers

Duration

(hours)

Order Acceptance

Order Acceptance

Order Entry

Registration Form

3

Drawing

New Drawing

Design

Registration Form

8

Updating the

Previous Drawing

Update

Registration Form

1

Modification Process

Update

Registration Form

4

Complexity

Coefficient (1-5)

Assigning coefficient

based on expert opinion

Per Coefficient

4

Raw Material Order

Placing the Order

Dimensioning the Order

Order Form

2

Planning department consists of two processes: CAD and CAM. CAD process consists of order acceptance and drawing sub-processes. Production of mold orders approved by the marketing department starts from the planning department. Definition, coding and general identification of the work is performed via order acceptance sub-process of the CAD process. This sub-process constant activity takes 5 hours in total: 3 hours for order acceptance, 2 hours for raw material order. Drawing sub-process involves drawing of the mold by Solidworks software. Factors affecting the activities here are whether the mold was utilized previously. It takes 8 hours if it is a new mold and a new project, and plus 4 hours if it has been produced before, however requires modification.

Figure 1. Planning department processes

We recommend using complexity coefficient in order to make it easier to measure the processes performed on the mold in terms of time. With this coefficient, a score between 1 and 5 indicates the difficulty level of the mold. This coefficient will be used for planning or other stages such as CNC and Assembly. After completion of the drawing stage, raw materials are order based on clarified dimensions. Time driver of CAD process is 4 hours per complexity coefficient, and placing the order takes 2 hours per mold.

CAD process time equation = 3 + (7x1) + 1 + (4x2) + (4x3) + 2

x1 = (1) for new mold, (0) if previously worked

x2 = (1) a new mold requires modification,

x3 = Complexity coefficient (coefficient between 1-5)

CAD time equation for an order with a new mold and complexity level 2; 3 + (7x1) + 1

+ (4x0) + (4x2) + 2 = 21 hours

CAD time equation for an order with an old mold requiring modification and complexity level 1; 3 (7x0) + 1 + (4x1) + (4x1) + 2 = 12 hours.

During CAM process, activities similar to CAD process are performed. Orders with completed CAD processes are programmed for CNC machines in this process. Constant durations required for sub-processes differ. Constant activity of CAM process is 4 hours. New orders have an impact of 11 hours, modification takes 2 hours, and degree of complexity has an effect of 4 hours per coefficient.

CAM process time equation = 4 + (9x1) + 2 + (4x2) + (4x3)

x1 = (1) for new mold, (0) if previously worked

x2 = (1) a new mold requires modification,

x3 = Complexity coefficient (coefficient between 1-5)

Time equation of CNC department

During CNC process, orders with completed CAM processes are processed on CNC machines. Constant durations and time drivers required for these processes differ based on planning stage. Constant activity of CNC process is 16 hours. These activities include sub-processes such as uploading CAM data to CNCs, preparation of CNC devices, attaching drill bits, connecting molds to CNC device. In CNC process, number of meshes and surface area size of the mold are of great impact. CNC process duration increases in parallel with number of meshes and surface area. Time drivers of the mold are 4 hours per mesh, 2 hours per surface area coefficient and 3 hours per complexity coefficient.

Time equation of CNC process = 16 + (4x4) + (2x5) + (3x3)

x4 = Number of meshes of the mold

x5 = Surface area of the mold

x3 = Complexity coefficient (difficulty level 1-5)

Time equation of other machining processes department

The department called other machining processes includes the processes for Borwerk, Manual Lathe, Peck Drilling and Erosion. Borwerk processes can be performed within the enterprise or assigned to contractors outside the enterprise. Contracting is preferred for larger molds while small molds are produced within the enterprise. Constant activity of the process is 4 hours for Borwerk sub-process and 5 hours for other sub-processes. Area of the mold is effective in Borwerk process while the same process is applied to each mold in processes such as manual lathe and peck trilling. Area coefficient is considered as 2 hours for Borwerk process and 1 hour for other processes.

Time equation of Borwerk process = (4x6) + (2x5)

x6 = (1) If Borwerk will be performed at the enterprise, (0) for contractor, x5 = Surface area of the mold (a coefficient between 1-3 based on size) Time equation of other machining process = 5 + (x5)

Time equation of assembly department

Assembly process is the process where the mold parts with completed CNC process are combined and the mold is constructed. It constitutes one of the most important parts of the process, and it is mainly carried out by manual labor. Constant activity of the process is 12 hours. Effect of each mesh of the mold is 4 hours, each complexity coefficient is 2 hours and application of hot runner technology is 3 hours.

Time equation of assembly process = 12 + (4x4) + (2x3) + (2x7)

x4 = Number of meshes on the mold,

x3 = Complexity coefficient (a coefficient between 1-5)

x7 = For hot runner technology, (1) if yes, (0) if no

Time equation of delivery department

Delivery process consists of test, painting and packing sub-processes. These processes are standard for each mold. In case of a problem during test process, the mold is interfered in Assembly department again. These sub-processes are 4 hours for each test, 4 hours for painting and 4 hours for packing. In this process, properties such as size of the mold and number of meshes are not of great importance.

Time equation of delivery process = (4x8) + (4x9) + 4

x8 = Number of tests performed,

x9 = For painting of the mold, (1) if yes, (0) if no

After time equations required for orders are created, durations requested by each sub-process of departments are calculated. Properties of 32 orders produced by the enterprise for January-March period are given below.

Table 6. Time driver properties of orders

SN

Orders

Prod. Diam.

Prod. Form

No. Of

Meshes

New

Old

Modif.

Compl.

Coeff. (1-5)

Borwerk/ Contr.

Surface

Area (1,2,3)

Hot Runner

No.

Of Tests

Paint

1

Ø63 T 2

MESH

63

T

2

1

0

0

2

1

1

0

1

1

2

Ø63 ELBOW

90° 2 MESH

63

D90

2

1

0

0

2

1

1

0

1

1

3

Ø50 FORK 2

MESH

50

FORK

2

0

1

1

2

1

1

0

1

1

4

Ø100 FORK 1

MESH

100

FORK

1

0

1

1

2

0

3

0

2

1

5

Ø50 ELBOW-

90° 2 MESH

50

D90

2

0

1

1

2

1

1

0

1

1

6

Ø63 ELBOW-

45° 2 MESH

63

D45

2

0

1

1

2

1

1

0

1

1

7

Ø50 ELBOW-

45° 2 MESH

50

D45

2

1

0

0

2

1

1

0

1

1

8

Ø100 T 1

MESH

100

T

1

1

0

0

2

0

3

0

2

0

9

Ø50 T 2

MESH

50

T

2

1

0

0

2

1

1

0

1

0

10

Ø40 ELBOW-

90° 2 MESH

40

D90

2

0

1

1

2

1

1

1

1

1

11

Ø32 ELBOW-

90° 4 MESH

32

D90

4

1

0

0

2

1

1

1

1

1

12

Ø32 ELBOW-

45° 4 MESH

32

D45

4

1

0

0

2

1

1

1

1

1

13

Ø40 ELBOW-

45° 2 MESH

40

D45

2

1

0

0

2

1

1

1

1

1

14

Ø32 T 4

MESH

32

T

4

1

0

0

2

1

1

0

1

1

15

Ø40 T 2

MESH

40

T

2

1

0

0

2

1

1

0

1

1

16

Ø75 CLAMP

BODY

75

BODY

8

1

0

0

4

0

2

0

1

0

17

Ø75 CLAMP

COVER

75

COVER

8

1

0

0

4

0

2

0

2

0

18

Ø75 T 1

MESH

75

T

1

0

1

1

2

0

2

0

1

1

19

A098-Ø75 ELBOW 90° 1

MESH

75

D90

1

0

1

1

2

0

2

0

1

1

20

Ø75 ELBOW

45° 1 MESH

75

D45

1

0

1

1

2

0

2

0

1

1

21

Ø90 T 1

MESH

90

T

1

1

0

0

2

0

3

0

1

1

22

Ø90 ELBOW-

90° 1 MESH

90

D90

1

0

1

1

2

0

3

0

1

1

23

Ø90 ELBOW-

45° 1 MESH

90

D45

1

0

1

1

2

0

3

0

1

1

24

Ø32 ELBOW-

45° 8 MESH

32

D45

8

1

0

0

3

1

3

0

1

0

25

Ø40 ELBOW-

45° 6 MESH

40

D45

6

1

0

0

3

1

3

0

1

0

26

Ø50 ELBOW-

45° 4 MESH

50

D45

4

1

0

0

3

1

3

0

1

0

27

Ø63 ELBOW-

45° 2 MESH

63

D45

2

0

1

0

3

1

3

0

1

0

28

Ø25 ELBOW-

90° 132MESH

25

D90

32

1

0

0

4

1

3

0

2

1

29

Ø32 ELBOW-

90° 16 MESH

32

D90

16

1

0

0

4

1

3

0

1

1

30

Ø40 ELBOW-

90° 12 MESH

40

D90

12

1

0

0

4

1

3

0

1

1

31

Ø50 ELBOW-

90° 8 MESH

50

D90

8

1

0

0

4

1

3

0

1

1

32

Ø63 ELBOW-

90° 4 MESH

63

D90

4

1

0

0

4

1

3

0

1

1

Durations requested by orders are calculated below by using the time driver properties above.

Table 7. Calculation of durations requested by orders (hours)

SN

Planning

CNC

Other Machining

Assembly

Delivery

Total (hours)

CAD

CAM

Borwerk

Manual

Test

Paint

Pack

1

21

23

32

6

6

24

4

4

4

124

2

21

23

32

6

6

24

4

4

4

124

3

18

18

32

6

6

24

4

4

4

116

4

18

18

32

0

8

20

8

4

4

112

5

18

18

32

6

6

24

4

4

4

116

6

18

18

32

6

6

24

4

4

4

116

7

21

23

32

6

6

24

4

4

4

124

8

21

23

32

0

8

20

8

0

4

116

9

21

23

32

6

6

24

4

0

4

120

10

18

18

32

6

6

27

4

4

4

119

11

21

23

40

6

6

35

4

4

4

143

12

21

23

40

6

6

35

4

4

4

143

13

21

23

32

6

6

27

4

4

4

127

14

21

23

40

6

6

32

4

4

4

140

15

21

23

32

6

6

24

4

4

4

124

16

29

31

64

0

7

52

4

0

4

191

17

29

31

64

0

7

52

8

0

4

195

18

18

18

30

0

7

20

4

4

4

105

19

18

18

30

0

7

20

4

4

4

105

20

18

18

30

0

7

20

4

4

4

105

21

21

23

32

0

8

20

4

4

4

116

22

18

18

32

0

8

20

4

4

4

108

23

18

18

32

0

8

20

4

4

4

108

24

25

27

63

10

8

50

4

0

4

191

25

25

27

55

10

8

42

4

0

4

175

26

25

27

47

10

8

34

4

0

4

159

27

18

18

39

10

8

26

4

0

4

127

28

29

31

162

10

8

148

8

4

4

404

29

29

31

98

10

8

84

4

4

4

272

30

29

31

82

10

8

68

4

4

4

240

31

29

31

66

10

8

52

4

4

4

208

32

29

31

50

10

8

36

4

4

4

176

Total

4,849

Durations of the orders stated above means the working hours required within the enterprise for each order. Contractor production durations were not added to the time calculation required for the order. Contractor processes were not included in the time equation but associated with orders in calculation of order costs as direct expense.

4.6 Calculation of order cost and determination of idle capacity

After order durations are calculated, the duration required for each resource group is multiplied by capacity cost rates. Idle capacity is calculated based on the practical capacity durations stated in Table 4 above.

Table 8. Comparison of durations requested from orders and practical capacities

Orders

Planning Duration Request

(hrs)

CNC

Duration Request

(hrs)

O. Machining Duration

Request (hrs)

Assembly Duration Request

(hrs)

Delivery Duration Request

(hrs)

Total Duration Request

(hrs)

Total

Duration

1,456

1,480

393

1,152

368

4,849

Practical

Capacity

1,764

1,764

44

1,323

441

5,733

Capacity

Used

82.5%

83.9%

89.1%

87.1%

83.4%

84.6%

Idle

Capacity

17.5%

16.1%

10.9%

12.9%

16.6%

15.4%

Table 8 shows the idle capacity calculations as a result of the durations requested from orders and practical capacity. According to this, it was respectively 17.5% for Planning department, 16.6% for Delivery department, 16.1% for CNC department, 12.9% for Assembly department and lastly 10.9 for Other Machining Processes department. Total average idle capacity rate is calculated as 15.4%.

Number of workers at the enterprise being 13 and the idle capacity rates ensure facing towards efficiency rather than reducing the number of personnel. In enterprises where number of employees are higher, these rates will provide more meaningful information about excessive personnel.

Following Table 9 shows the conversion costs assigned to orders.

Table 9. Conversion costs assigned to orders

Orders

Planning Assigned Costs (34,26)

TRY/h

CNC

Assigned Costs (64,86)

TRY/h

O. Machining Assigned Costs

(127,76)

TRY/h

Assembly Assigned Costs (57,80)

TRY/h

Delivery Assigned Costs (73,30)

TRY/h

Total Assigned Conversion Costs

1

1,508

2,075

1,533

1,387

880

7,383

2

1,508

2,075

1,533

1,387

880

7,383

3

1,233

2,075

1,533

1,387

880

7,108

4

1,233

2,075

1,02

1,156

1,173

6,659

5

1,233

2,075

1,533

1,387

880

7,108

6

1,233

2,075

1,533

1,387

880

7,108

7

1,508

2,075

1,533

1,387

880

7,383

8

1,508

2,075

1,022

1,156

880

6,641

9

1,508

2,075

1,533

1,387

586

7,087

10

1,233

2,075

1,533

1,560

880

7,281

11

1,508

2,594

1,533

2,023

880

8,538

12

1,508

2,594

1,533

2,023

880

8,538

13

1,508

2,075

1,533

1,560

880

7,556

14

1,508

2,59

1,533

1,849

880

8,364

15

1,508

2,075

1,533

1,387

880

7,383

16

2,056

4,151

894

3,005

586

10,692

17

2,056

4,151

894

3,005

880

10,986

18

1,233

1,946

894

1,156

880

6,109

19

1,233

1,946

894

1,156

880

6,109

20

1,233

1,946

894

1,156

880

6,109

21

1,508

2,075

1,022

1,156

880

6,641

22

1,233

2,075

1,022

1,156

880

6,366

23

1,233

2,075

1,022

1,156

880

6,366

24

1,782

4,086

2,300

2,890

586

11,644

25

1,782

3,567

2,300

2,427

586

10,662

26

1,782

3,048

2,300

1,965

586

9,681

27

1,233

2,529

2,300

1,503

586

8,151

28

2,056

10,507

2,300

8,554

1,173

24,590

29

2,056

6,356

2,300

4,855

880

116,447

30

2,056

5,318

2,300

3,930

880

14,484

31

2,056

4,281

2,300

3,005

880

12,522

32

2,056

3,243

2,300

2,081

880

10,560

Total Assigned

Conversion Costs

49,889

95,982

50,209

66,579

26,982

289,641

Total Distributed

Conversion Costs

60,439

114,409

56,343

76,464

32,324

339,980

Amount of

Difference

10,550

18,427

6,134

9,885

5,342

50,339

Conversion costs transferred to orders were calculated by using time equations from each resource group. Total orders costs obtained if raw material costs are added to the conversion costs assigned to orders can be found in the Table 9 above. When Table 9 is examined, it can be observed that there are significant differences between assigned costs and distributed costs. These differences indicate the idle capacity.

Table 10. Conversion costs assigned to orders

Orders

Conversion

Costs

Raw Material and

Material Costs

TDABC Mold

Costs

Volume-Based

Mold Cost

Difference

1

7,383

6,400

13,783

16,500

2,717

2

7,383

6,030

13,413

15,500

2,087

3

7,108

6,980

14,088

18,000

3,912

4

6,659

6,980

13,639

18,000

4,361

5

7,108

6,400

13,508

16,500

2,992

6

7,108

6,400

13,508

16,500

2,992

7

7,383

5,820

13,203

15,000

1,797

8

6,641

6,210

12,851

16,000

3,149

9

7,087

6,400

13,489

16,500

3,011

10

7,281

6,400

13,681

16,500

2,819

11

8,538

5,430

13,967

14,000

32

12

8,538

6,980

15,518

18,000

2,482

13

7,556

6,600

14,156

17,000

2,844

14

8,364

6,210

14,574

16,000

1,426

15

7,383

6,980

14,363

18,000

3,637

16

10,692

7,950

18,642

20,500

1,858

17

10,986

6,600

17,586

17,000

-586

18

6,109

6,980

13,089

18,000

4,911

19

6,109

6,400

12,509

16,500

3,991

20

6,109

6,400

12,509

16,500

3,991

21

6,641

7,760

14,401

20,000

5,599

22

6,366

6,790

13,156

17,500

4,344

23

6,366

7,180

13,546

18,500

4,954

24

11,644

8,540

20,184

22,000

1,816

25

10,662

6,600

17,262

17,000

-262

26

9,681

5,820

15,501

15,000

-501

27

8,151

6,400

14,551

16,500

1,949

28

24,590

10,090

34,680

26,000

-8,680

29

116,447

6,980

23,427

18,000

-5,427

30

14,484

6,400

20,884

16,500

-4,384

31

12,522

6,400

18,922

16,500

-2,422

32

10,560

6,010

16,570

15,500

-1,070

Total Assigned

Conversion Costs

289,641

215,520

505,161

555,500

50,339

In the Table 10 above, the raw material costs directly recorded by the application enterprise were added to conversion costs and TDABC mold costs were calculated. When cost calculated based on volume and costs calculated with TDABC methods were compared, it can be seen that there are cost differences between two methods although it differs for each order. For instance, cost of the order which is 13,783 TRY according to TDABC method in the first order was 16,500 TRY according to the volume-based costing method used by the enterprise. That means a 2,717 TRY difference between two costing methods. On the other hand, cost for order no. 28 was calculated as 34,680 TRY when it is 26,000 TRY according to the volume-based costing method used by the enterprise. In this instance, cost difference is -8,680 TRY. Based on these two examples, the enterprise calculates the cost of some orders higher or lower than they should be.

Total difference between both cost calculation methods is 50,339 TRY, and this is the idle capacity cost. This idle capacity cost is not included in order costs in TDABC method but considered as a management cost. If required, idle capacity cost can be estimated and distributed to order cost based on the TDABC costs above. In this case, cost differences between two methods for each order will be due to the difference of methods only.

5. 5. Conclusion

Studies carried out in relation to TDABC are mainly focused on enterprises which carry out serial production and provide standard services. In this study, mold production industry which performs order-based production was examined. Mold production is a project-based activity and carries all properties of order-based production. With this study, TDABC method was applied to an enterprise conducting mold production, and it was seen that it is possible to apply the method to enterprises conducting order-based production.

Order costs in the application enterprise are calculated based on volume-based costing principle. Said order costs are not for control purposes, but rather calculated during proposal stage. Costing in enterprises is generally used as a marketing tool rather than a management tool. This condition is frequently observed in industries with high profitability rates. However, enterprises which do not accurately follow their costs may experience financial troubles in times when profitability decreases, and competition increases.

In the study, six-stage procedure of TDABC was used as it is generally accepted in the literature. Five resource groups as planning, CNC, other machining, assembly and delivery have been defined. Periodical costs of these groups were obtained from the accounting department. Daily working hours were taken as 7 hours as practical capacity. Costs assigned to resource groups were determined based on the time equations obtained from work analysis. Lastly, idle capacity was determined by calculating the order costs.

As a result of the capacity analysis of the enterprise of application, it can be seen that all production departments operate with a certain rate of idle capacity. The department with the highest idle capacity is planning department with 17.5% while other machining processes department has the lowest rate of 10.9%. Idle capacity rates require focusing on efficiency rather than reducing the number of personnel in small enterprises while they provide meaningful information on excess personnel in large-scale enterprises.

Application of TDABC is important especially in terms of determining the work processes, revealing the factors separating processes from each other and creating time equations. This process is a highly technical and difficult one which requires cooperation with workers. The fact that the enterprise has not made this kind of a definition may be interpreted as an additional contribution of the study to the enterprise. A part of the idle capacity calculated above is based on the deficient definition of the processes during production stage. This condition reveals that TDABC application is open to continuous development in enterprises which especially carry out order- and project- based production.

Volume-based costing method which is currently being used by the enterprise calculate the cost of most orders higher or lower than they should be. In the current competitive environment, this condition may cause losing the competitive advantage and decrease in the market share in the long run. On the other hand, resources cannot be effectively used in volume-based costing method since idle capacity is not calculated. TDABC provides a solution to this problem by calculating idle capacity based on resource groups. Order cost information calculated with TDABC method can be used as an effective management tool as well as for financial reporting purposes.

It can be interpreted as a restriction of the study considering the fact that sufficient support has not been obtained during collection of required data from workers despite the management finding the study beneficial and providing support. Although it was stated that the study will be used for academic purposes only, the workers were concerned that it was aimed at measuring their performances and therefore it would cause harm. Young workers were more eager to assist the study while older workers resisted or refused to help. Some workers left their jobs during the study and this caused challenges in terms of data collection.

Future studies may focus on enterprises from different industries which carry out order- and project- based production. When selecting the enterprises for application, factors such as application of a costing system, better defined work processes and higher number of personnel can be taken into consideration.

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Boyar, E. & Basti, M. (2021). An Application of Time-Driven Activity Based Costing Method in the Mold Manufacturing Industry. J. Account. Fin. Audit. Stud., 7(3), 260-280. https://doi.org/10.32602/jafas.2021.029
E. Boyar and M. Basti, "An Application of Time-Driven Activity Based Costing Method in the Mold Manufacturing Industry," J. Account. Fin. Audit. Stud., vol. 7, no. 3, pp. 260-280, 2021. https://doi.org/10.32602/jafas.2021.029
@research-article{Boyar2021AnAO,
title={An Application of Time-Driven Activity Based Costing Method in the Mold Manufacturing Industry},
author={Ender Boyar and Mehmet Basti},
journal={Journal of Accounting, Finance and Auditing Studies},
year={2021},
page={260-280},
doi={https://doi.org/10.32602/jafas.2021.029}
}
Ender Boyar, et al. "An Application of Time-Driven Activity Based Costing Method in the Mold Manufacturing Industry." Journal of Accounting, Finance and Auditing Studies, v 7, pp 260-280. doi: https://doi.org/10.32602/jafas.2021.029
Ender Boyar and Mehmet Basti. "An Application of Time-Driven Activity Based Costing Method in the Mold Manufacturing Industry." Journal of Accounting, Finance and Auditing Studies, 7, (2021): 260-280. doi: https://doi.org/10.32602/jafas.2021.029
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