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Activity-based costing (ABC) in service industry - Essay Example

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Activity-based costing (ABC) in service industry

However, it has often been argued that implementing such pricing strategies might prove to be quite challenging in case of service oriented companies in comparison to the product rendering companies owing to the greater involvement of intangible assets and liabilities. In this regard, various models have been developed with the intention to assist in determining the accurate costs incurred in following the entire process of delivering services to the ultimate customers. For instance, Activity Based Costing (ABC) can be regarded as an effective cost determination system that involves breaking up of the activities or the processes into individual activities (Shevasuthisilp & Punasathitwong, 2012). With this concern, this essay intends to present a brief overview of the ABC concept with reference to the business process executed by a large-sized service marketing company, Amazon.com. The discussion will thus address the benefits of time-driven ABC system for the selected service company along with the corresponding competitive advantages to be attained by the organization. The potential impact of such costing system will further be evaluated in the context of e-commerce based service company compared with that of the traditional system. Company Overview Amazon.Com, Incorporation was established in Washington, USA in 1994. The company primarily renders its services to its versatile customer range through retail websites. The company is one of the earliest service based organizations involved in e-commerce or the sale of various merchandise through e-commerce. Contextually, the online retail operation of the company is considered to be the core business activity of Amazon.com. The vision of the company depicts that Amazon.com intends to provide high quality services to its customers. The customers’ services operations of the company comprise internally and externally managed contact centers. The company further provides programs that allow sellers from around the world to market their products through Amazon.com offering its customers to access ‘in-the-cloud infrastructure services’. Furthermore, it has been observed that the company generates its revenues from online advertisements and other promotional activities. Notably, the recent activities of the organization reveal that even in the circumstances where its rivals are struggling with their survival in the market place, the company is thriving, boasting increasing revenue (Morningstar, 2009). Implementation of Time Driven ABC Costs System and Related Benefits (Amazon.Com) ABC cost system includes grouping of indirect costs on the basis of processes and certain activities performed within the value chain system of the company. Furthermore, these indirect costs are allocated to services rendered to the customers, proportionately to the volume of activities that gave rise to these indirect costs rather on the entire departments. However, many problems have been found to be associated with the implementation of ABC model such as complexity issues, time-consuming technique and other problems related with the modification of the model. Contextually, time driven ABC involves time as the primary cost driver. Under this system, costs are directly allocated to costs objectives (Roztocki, 2010). At the initial step of time driven ABC system implementation, Amazon.com should critically determine the major purposes for implementing the procedure. The most common objective for implementing the ABC system is to gain efficiency in controlling the overall costs taking into account the overhead costs in measuring the profitability of the company. Contextually, overhead costs related with Amazon.com include rent, office expenses, ...Show more

Summary

In today’s highly competitive business environment both in the contexts of product as well as service industries,companies have been observed to continuously strive for marketing the commodities at a reasonable price…
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Activity-based costing (ABC) in service industry essay example
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