Trace the work each customer creates, then make the cost of unused capacity visible.
01 · The picture
Trace the work each customer creates, then make the cost of unused capacity visible.
Follow the decisions
01Resource cost
02Practical capacity
03Customer activity
04Unused capacity
02 · The idea
How I understand it.
Customers with similar revenue can create very different amounts of work through order changes, support, setups and special deliveries. Activity-based costing traces resources through those activities to the products or customers that use them. Choose drivers that explain the work. A time-driven version estimates a resource group's cost and practical capacity, then divides cost by capacity to obtain a rate per minute or another suitable unit. Estimate how much capacity each activity consumes and assign the corresponding cost. Show unused capacity separately so managers can decide whether to fill, retain or reduce it. Update estimates when processes or resource costs change. Use the analysis to investigate service design, batch sizes, pricing and staffing. Allocated cost requires judgement: losing a customer only saves cash when the associated resource spending can actually be avoided.
03 · A fictional example
Put it into a business.
A support team costs £12,000 a month and supplies 20,000 practical minutes. Its capacity rate is £0.60 a minute. An account using 500 minutes receives £300 of support cost. If customers use 15,000 minutes overall, £3,000 remains visible as unused capacity cost. Managers can assess growth opportunities and staffing commitments before deciding what action to take.
04 · Bring it into the room
Which customers consume hidden work, and how much of your available capacity remains unused?
One decisionOne next actionOne way to check
Where this note comes from
An original explanation drawn from my saved learning material. The worked example is fictional.
Harvard OPM · Unit 1Course reading or session material
Control - Wilkerson Slides-Cost Accounting and ABC Slides
PDF pages 2–8 and 11–12; activity-based costing and managerial action
Harvard OPM · Unit 3Course reading or session material
Time-Driven Activity-Based Costing
PDF pp. 1–7; cost-to-serve, capacity cost rate, unit times, unused capacity and updating
These notes collect my interpretations and applications. The schools and authors retain their original teaching materials.