Time‑Value Costing

Executive Summary

Traditional absorption costing ties profit margins to manufacturing costs, which are often dominated by materials. When raw material prices rise, absolute profits rise automatically — without any additional value creation. This produces windfall profits and reputational risk.

TVC solves this by passing material through 1:1 (or index‑/plan‑based), valuing every internal activity as Time × Rate, and generating profit only on value‑creating time. The result is a fair, transparent, and stable pricing system with predictable margins. Pass‑Through and Mark‑Up research explains market price transmission; TVC translates this into a clear operational rule.

Cost Allocation Logic describes why traditional cost‑plus and absorption costing models often generate distorted price signals and windfall profits when material prices fluctuate. Time‑Value Costing (TVC) directly addresses these structural issues by separating material as a margin‑neutral pass‑through and linking profit exclusively to value‑creating time. TVC is therefore the operational solution to the pricing and governance problems outlined in the Cost Allocation Logic analysis.

Customer Value and TVC

The Customer‑Holder Principle is a strategic filter: invest only in activities that create demonstrable, sustainable customer value. TVC provides the operational translation:

• Material = pass‑through, no margin

• Work = Time × Rate

• Profit = only on value‑creating time

This makes the customer — the only external revenue source — not just a philosophical priority but a financial steering anchor. Opportunistic windfall profits disappear; transparency and trust increase.

The Markup Trap

In traditional cost‑plus logic, overhead and profit are often applied as a percentage on volatile material costs. If steel, energy, or chemical inputs increase, the final price rises not only by the real cost increase but also by the percentage‑based profit markup. The company earns a windfall profit without delivering more value — a political, ethical, and commercial risk. Empirical research shows that cost shocks are passed through in many markets, but the profit basis is a managerial choice.

The TVC Logic

TVC separates pass‑through (material) from value creation (time).

Customer Value as the North Star

Decisions and processes are “right” only if they create measurable customer value. TVC ensures that price and profit come exclusively from internal performance — not from raw material volatility.

Material as a Neutral Flow

Purchase prices are passed through 1:1 — or governed by index or plan price with contractual true‑up/down. No margin on material. Pass‑Through research explains indexation; TVC makes it operational and governance‑safe.

Work as Time × Rate

Every activity (production, machine, logistics, admin, sales, quality, PM) is valued as Time × Rate. This follows Time‑Driven Process Costing and avoids arbitrary overhead markups.

Profit‑Per‑Hour

Profit is not a percentage on cost but a profit per value‑creating hour. Profit per minute becomes predictable; Capacity × Profit/Minute = Forecast.

TVC Structure (A/B/C)

Block A — Material

Purchase price (Actual / Index / Plan).

Block B — Internal Value Creation

Fabrication time × labor rate Machine time × machine rate Logistics time × rate Admin time × rate Quality, PM, sales time × rate

Block C — Profit

Value‑creating time × profit‑per‑hour

Formula

Price = A + B + C

Material Price Governance

TVC supports three clean approaches without forcing weighted averages.

Real‑Time Transparency

Actual or indexed price → fluctuations visible and fair.

Stability Mode (“Lindt Logic”)

Long‑term plan or average prices for brands or contracts requiring price stability; differences settled via true‑up/down.

Hybrid Models

Index + cap/floor for highly volatile commodities.

In all cases, profit remains independent of material → no windfalls.

Numerical Example (USD)

A product requires 1.00 h fabrication and 0.10 h administrative time.

Material shock (80 → 100 USD):   New A = 100 USD → Price = 200 USD. Profit remains exactly 25 USD. Fair partner, no windfall profit.

Advantages

No Windfall Profits

Profit is decoupled from material volatility.

Maximum Transparency

Customers pay for performance, not market noise.

Better Process Steering

Time models reveal administrative bottlenecks.

Stable Forecasts

Profit/minute × capacity = predictable earnings.

Strategic Compatibility

Target Costing sets design constraints; TVC governs pricing.

Challenges

Data Quality

Standard times and rates must be maintained.

Communication

Sales must explain value creation instead of cost‑plus logic.

Implementation Roadmap

Define time models for production, machine, admin, sales, quality, PM. Calculate hourly rates for labor, machine, and overhead. Set profit‑per‑hour based on market, capacity, and return targets. Choose material logic (Actual / Index / Plan). Update offer templates with clear A/B/C separation. Roll‑out through training, pilots, review, and scaling.

Capacity & Profit Forecasting

Profit/Minute = Profit‑Per‑Hour ÷ 60.

Period Profit = Available Value‑Creating Minutes × Utilization × Profit/Minute

Forecast becomes independent of material volatility.

Comparison with Other Methods

TVC integrates insights from Pass‑Through research, process costing, and Target Costing into one operational rule.

Academic Anchoring (ACCA & CIMA)

TVC aligns fully with international management accounting standards and supports curricula in costing, pricing, governance, risk, and performance management.

Competency Mapping

Costing Methods → time‑driven logic avoids markup distortions. Decision‑Making → profit/minute enables better mix and bottleneck decisions. Governance & Ethics → integrity pricing, no profit on material. Performance Management → stable KPIs and forecasts. Risk & Pricing → index governance, cap/floor, transparency.