Managerial/Cost Accounting | University of Texas at Austin
Difficulty: Intermediate | Prerequisites: Part 1 of these notes (BCH background and RCC costing). Familiarity with traditional ABC is helpful for understanding why TDABC was developed as an alternative.
Part 1 showed why BCH's traditional RCC costing system produces misleading cost figures. This second set of notes covers the alternative: Time-Driven Activity-Based Costing (TDABC), which BCH's plastic and oral surgery department piloted under Dr. Meara. TDABC attempts to measure what each procedure actually consumes in staff time and resources across a full care cycle. The case walks through the capacity cost rate calculations, raises practical objections (should we include fixed costs? are surgeons really only available 6.6 hours per day?), and asks you to evaluate whether TDABC gives BCH the information it needs to compete under global payment contracts.
TDABC calculates the cost of each procedure by multiplying the time each resource spends on it by that resource's cost per minute. At BCH, this revealed that procedures RCC treated as equally costly were in fact dramatically different. The approach requires upfront process mapping but uses only two inputs per resource (annual cost and available clinical minutes), making it simpler to maintain than traditional ABC.
Practical capacity
The amount of time a resource is realistically available for productive work, after subtracting vacations, holidays, training, breaks and non-clinical duties. In simple terms, it is the answer to "how many minutes per year does this person actually spend on patient care?"
Clinical hours per day
The portion of a staff member's working day spent on direct clinical activities, after deducting breaks, training, meetings and (for surgeons) research and teaching time. For BCH surgeons, this works out to 6.6 hours per day out of a 10-hour workday.
Process map / care cycle map
A detailed record of every administrative and clinical step a patient goes through for a specific condition, from first contact through treatment to discharge and follow-up. TDABC requires this map before costs can be assigned.
Bundle pricing
A single fixed price for the entire care cycle of a condition, rather than billing each step separately. The case debate centres on whether bundle pricing can work if the hospital does not know its true per-activity costs.
Unused capacity
The difference between the total resource capacity a hospital pays for and the capacity actually consumed by patient care. TDABC makes unused capacity visible because it only assigns costs for time actually used, unlike RCC which spreads all costs across all charges.
TDABC requires only two estimates per resource group:
The cost per unit of supplying resource capacity (cost per minute)
The unit times of consumption of resource capacity by each activity (minutes per activity)
Multiply the two together and you get the cost of that resource for that activity. Sum across all resources involved in a procedure and you get the total procedure cost.
The case provides detailed data for four resource types in the plastic and oral surgery department. Here is how the capacity cost rate is derived for each:
Step 1: Calculate working weeks
Start with 52 weeks per year
Subtract vacations and holidays: 6 weeks for surgeons, 4 weeks for other staff
Subtract training and leave: 2 weeks for all
Result: Surgeons work 44 weeks; ASR, RN and Clinical Assistant work 46 weeks
Step 2: Calculate clinical hours per day
Surgeons: 10 hours/day, minus 1.2 hours for breaks/training/meetings = 8.8 available hours, minus 2.2 hours for research and teaching = 6.6 clinical hours
ASR, RN, Clinical Assistant: 8 hours/day, minus 1.5 hours for breaks/training/meetings = 6.5 clinical hours (no research deduction)
Step 3: Calculate annual clinical capacity in minutes
Surgeon: 6.6 hours x 60 minutes x 5 days x 44 weeks = 87,120 minutes per year
ASR: 6.5 hours x 60 minutes x 5 days x 46 weeks = 89,700 minutes per year
RN: 6.5 x 60 x 5 x 46 = 89,700 minutes per year
Clinical Assistant: 6.5 x 60 x 5 x 46 = 89,700 minutes per year
Step 4: Divide annual cost by annual clinical minutes
Surgeon: $522,720 / 87,120 = approximately $6.00 per minute
ASR: $89,700 / 89,700 = approximately $1.00 per minute
RN: $134,550 / 89,700 = approximately $1.50 per minute
Clinical Assistant: $71,760 / 89,700 = approximately $0.80 per minute
The surgeon's cost per minute is roughly six times the clinical assistant's. This is the insight RCC misses entirely: a minute of surgeon time costs far more than a minute of assistant time, so procedures that consume more surgeon time should show higher costs.
The annual cost per person is not just salary. It includes compensation, benefits, office expenses, billing services and other overhead allocated to that individual. The case raises the question of whether fixed costs like office rent and billing should be included. The TDABC answer is yes: these costs exist to support the clinical capacity, and the capacity cost rate should reflect the full cost of making that capacity available.
Feature | RCC | TDABC |
|---|---|---|
Cost driver | Charges (dollar amount billed) | Time (minutes of each resource consumed) |
Accuracy for diverse procedures | Poor: all same-charge procedures show identical costs | Good: procedures with different resource profiles show different costs |
Data requirements | Low: uses existing billing and financial data | Higher: requires process mapping, time estimates and resource costing |
Implementation effort | Minimal | Significant upfront; simpler to maintain than traditional ABC |
Visibility into unused capacity | None | Yes: only time actually consumed is assigned to procedures |
Suitability for global payments | Poor: cannot identify which procedures are profitable | Strong: reveals true cost per care cycle |
Traditional activity-based costing (ABC) also tried to fix the problems with volume-based allocation, but it became impractical in complex organisations. The main complaints were high costs of reinterviewing and resurveying staff, infrequent updates that let the model go stale, and estimates that became inaccurate over time.
TDABC addresses these by reducing the inputs to just two per resource (cost rate and time), which are easier to estimate and update.
The case notes that the physician leading the TDABC experiment objected to bundle pricing. His argument: if you offer a single price for an entire care cycle, you lose the ability to understand the cost of individual activities within that cycle.
This objection confuses pricing with costing. TDABC maps every activity in the care cycle and costs each one separately. The fact that the patient sees a single bundled bill does not prevent the hospital from knowing its own internal costs per activity. Bundle pricing is a pricing strategy; TDABC is the costing system that tells you whether that bundle price is profitable.
Beyond healthcare, TDABC is valuable for any organisation with these characteristics:
Service-based rather than manufacturing-based (labour is the main cost)
High product or service diversity (different customers consume very different amounts of resources)
High overhead costs that are difficult to trace to individual products
Competitive pressure to understand true unit costs
Examples include law firms, consulting firms, financial services, logistics companies and universities.
\text{Capacity Cost Rate} = \frac{\text{Annual Cost of Resource}}{\text{Annual Clinical Minutes Available}}\text{Annual Clinical Minutes} = \text{Clinical Hours/Day} \times 60 \times 5 \times \text{Working Weeks}\text{Activity Cost} = \text{Capacity Cost Rate} \times \text{Minutes Consumed by Activity}\text{Total Procedure Cost} = \sum (\text{Activity Cost for each resource involved})Worked example for a surgeon's capacity cost rate: $522,720 / (6.6 x 60 x 5 x 44) = $522,720 / 87,120 = $6.00 per minute (approximately).
Students often think TDABC is just "a better version of ABC." It is a fundamentally different approach. Traditional ABC surveys employees to estimate what percentage of time they spend on each activity. TDABC skips the surveys entirely and instead directly estimates the time required for each activity, then calculates costs from time and cost rates.
Students sometimes argue that surgeons should be costed based on their full 10-hour day or their 8.8 available hours, rather than the 6.6 clinical hours. The 6.6-hour figure is correct for clinical costing because research and teaching time should not be loaded onto patient care costs. Using 10 hours would understate the cost per clinical minute and produce misleadingly low procedure costs.
Students frequently confuse cost with price. TDABC tells you what a procedure costs. What you charge for it is a separate strategic decision. A procedure can be accurately costed at $500 and priced at $350 (a loss leader) or $700 (a profit centre).
Students sometimes assume that including fixed costs (office expenses, billing) in the capacity cost rate is incorrect because those costs do not change with volume. TDABC includes them deliberately: these costs exist to support clinical capacity, and the cost rate should reflect the full economic cost of providing that capacity, not just the variable portion.
⚠️ Be able to calculate a capacity cost rate from scratch given annual cost, hours per day, deductions and working weeks. Walk through each step, not just the final division.
⚠️ Know why TDABC uses clinical hours (6.6 for surgeons) rather than total hours (10) or available hours (8.8). The rationale is that research and teaching time is not a clinical cost.
⚠️ Be ready to explain the difference between TDABC and traditional ABC. The key distinction is that TDABC estimates time per activity directly rather than surveying employees about time allocation percentages.
⚠️ Expect a question on the strategic implications of the capacity cost rate data. The surgeon's rate is roughly $6/minute while the clinical assistant is roughly $0.80/minute. Any process redesign that shifts work from surgeons to lower-cost staff reduces procedure costs.
⚠️ Be prepared to argue both sides of the bundle pricing debate. The physician's objection (bundles hide true costs) versus the counterargument (TDABC maps costs internally regardless of how you bill externally).
Fill in the blank: TDABC requires only two estimates per resource group: the ______ and the ______. (Answer: cost per unit of supplying resource capacity; unit times of consumption of resource capacity by products)
True or False: Under TDABC, a surgeon's cost per minute is calculated using their full 10-hour workday. (Answer: False, it uses only clinical hours, which is 6.6 hours for surgeons at BCH)
True or False: TDABC was developed because traditional ABC was too difficult and expensive to maintain. (Answer: True)
Fill in the blank: The surgeon's capacity cost rate at BCH is approximately ______ per minute, while the clinical assistant's is approximately ______ per minute. (Answer: 6.00; 0.80)
True or False: Bundle pricing and TDABC are incompatible because bundle pricing hides the cost of individual activities. (Answer: False, TDABC maps internal costs per activity regardless of how the patient is billed)
Q: Walk through the calculation of a surgeon's capacity cost rate at BCH. Show each step.
A: Start with 52 weeks, subtract 6 for vacations/holidays and 2 for training/leave, giving 44 working weeks. The surgeon works 10 hours per day, minus 1.2 hours for breaks/training/meetings = 8.8 available hours, minus 2.2 hours for research/teaching = 6.6 clinical hours per day. Annual clinical minutes = 6.6 x 60 x 5 x 44 = 87,120. Annual cost = 522,720. Capacity cost rate = 522,720 / 87,120 = approximately 6.00 per minute.
Q: Why does TDABC use clinical hours rather than total available hours to calculate the capacity cost rate? What would happen if you used total available hours instead?
A: Clinical hours represent the time actually spent on patient care. Research and teaching are separate activities with their own funding and purpose. Using total available hours (8.8 or 10) would spread the surgeon's cost across more minutes, producing a lower cost per minute and understating the true cost of clinical procedures. The resulting procedure costs would appear artificially low.
Q: A physician argues that TDABC is incompatible with bundle pricing because a bundle hides the cost of individual activities. Evaluate this argument.
A: The argument confuses pricing with costing. TDABC maps every activity in the care cycle and costs each one individually. The bundle price is what the patient or insurer pays. The hospital can set a single bundle price externally while maintaining full visibility into per-activity costs internally. In fact, TDABC is what makes bundle pricing rational: without knowing your activity-level costs, you cannot set a bundle price that covers your expenses.
Q: The case data shows that a surgeon costs approximately 6.00 per minute while a clinical assistant costs 0.80. What strategic implication does this have for process redesign?
A: Any task currently performed by a surgeon that could safely be delegated to a clinical assistant would reduce procedure costs by roughly 5.20 per minute shifted. For a procedure involving many hours of work, this can be substantial. TDABC gives managers the information to identify these opportunities, which RCC cannot because it does not track time by resource type.
Q: Why should fixed costs such as office expenses and billing services be included in the TDABC capacity cost rate, even though they do not vary with procedure volume?
A: These costs exist to support clinical capacity. A surgeon cannot see patients without an office, administrative support and billing infrastructure. TDABC calculates the full economic cost of making capacity available, not just the marginal cost of using it. Excluding fixed costs would understate the true cost of each procedure and give managers a misleadingly optimistic view of profitability.
TDABC is the applied version of the activity-based costing material covered earlier in most managerial accounting courses. If you studied traditional ABC and its problems (complexity, employee resistance, stale data), TDABC is the response to those problems.
The capacity cost rate concept connects to capacity management and the theory of constraints: unused capacity is not wasted if you can redeploy it, but TDABC makes it visible so managers can make that decision.
The value framework (outcomes on one axis, cost on the other) connects to strategy and operations management. BCH's challenge is to move along the efficiency frontier, delivering the same outcomes at lower cost, or to justify its higher cost with demonstrably better outcomes.
TDABC, time-driven activity-based costing, capacity cost rate, practical capacity, clinical hours, process mapping, care cycle costing, bundle pricing, traditional ABC vs TDABC, cost per minute, resource capacity, unused capacity, BCH plastic and oral surgery, Dr. Meara, overhead allocation, full cost vs variable cost, service industry costing, product diversity, global payments, value-based care, efficiency frontier, outcomes vs cost framework, working weeks calculation, annual clinical minutes