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activities. The accountants then use the operating cost matrix (EAD matrix) to allocate
resource costs to activities and the operating product matrix (ADP matrix) to allocate
operating costs to products.
Steps to implement the ABC model using the EAD matrix:
Step 1: Identify and collect direct costs.
Step 2: Identify and aggregate indirect costs. This step requires dividing overhead
costs into groups with similar characteristics.
Step 3: Identify activities.
Step 4: Choose a method for allocating resource costs. Resource costs can be
allocated directly or estimated for activities. Direct allocation requires measuring the
actual use of resources by activity. If the actual use of resources cannot be measured, the
proportion of labor time used for each activity can be estimated. Typically, an Activity-
Cost Matrix (EAD) is established to describe the relationship between costs and activities.
Step 5: Calculate the allocation level, including monetary value, for activities by
using the Activity-Cost Matrix (EAD) and the Activity-Product Matrix (ADP).
Step 6: Aggregate costs to calculate product cost.
At this stage, the accountant will aggregate the costs and calculate the product cost
using the following formula:
Product cost i = Direct costs of product i + Indirect costs of product i
The ABC model, using the EAD matrix, can be seen as a stepping stone in the
gradual transition from simpler and more cost-effective traditional methods of cost
determination. Furthermore, the EAD and ADP matrices comprehensively support the
provision of information on product costs and prices.
c. Time-driven ABC model (TDABC)
The TDABC model simplifies the cost calculation process by directly allocating cost
resources to cost objects using a more concise analytical framework and requiring only
two estimates. First, the cost calculation model provides resource capacity. Then, TDABC
uses the capacity cost ratio to allocate resource costs by department to cost objects,
based on the estimated resource capacity (usually time) required for each cost object.
These are the steps of the model:
Step 1: Estimate processing time, estimate the amount of time consumed.
The most important input to the TDABC model is the time (capacity) required to
perform an operation, such as processing an order or performing a production operation.
Step 2: Build the time equation.
- Estimate the minimum time to complete the process; this is called the Order of
Purchase (PO) in the time equation, encompassing the basic execution time and other
factors that increase the basic execution time, such as material handling time and
material delivery time.
Execution Time = Basic Execution Time + Support Time for Basic Execution Time
- For simple production processes with few other factors, but for processes with
high costs or significant fluctuations, the time equation will be extended.
Step 3: Calculate the Cost-Capacity Ratio.
- Estimated Total Cost of the Department: Indirect costs allocated to the
department are the numerator in the calculation of the actual capacity ratio.
- Estimated Actual Capacity: Actual capacity is the denominator in the calculation of
the cost-capacity ratio; it represents the actual capacity of resources to perform tasks
within the department.

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