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

? Activity-Based Costing (ABC) in Service Industry Introduction In today’s highly competitive business environment both in the contexts of product aswell as service industries, companies have been observed to continuously strive for marketing the commodities at a reasonable price maintaining their profitability at a sustainable rate. 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, utility costs and administrative costs among others (Roztocki, 2010). Amazon.Com should carefully identify the activities, particularly those which are closely related with overhead expenses. The company can use value chain analysis for the purpose of determining such activities. The typical value chain for Amanzon.com may begin with activities that create demand for the company’s products such as marketing of highly demanded products and maintaining web sites which offers adequate information. Moreover, other activities such as processing of customers orders, managing inventory and shipping of customers’ orders may also be linked with value chain activities of the company. It is in this context that the identification of its business activities will help Amazon.com to prioritize certain activities while adopting time driven ABC system. Apart from indirect costs, there are other costs such as direct costs which should be traced appropriately and related with costs objectives which further need to be identified for efficiently allocating overhead expenditures. The total estimated costs that have been acquired during the generation of costs objects are finally traced by adding both direct and indirect costs. After analysis of ABC, the managers can develop necessary planning and decisions to improve the operational as well as strategic performance of the company (Roztocki, 2010). The adoption of time driven ABC system can be thus quite beneficial for the company in gaining a better insight to the costs incurred to market the services as it is easy to be maintained and updated on a regular basis, removes difficulties associated with implementation traditional ABC system, helps in decision making of the management and motivates the management to analyze activities, helps to reduce non-value added expenses, provides a clear picture of related expenses incurred in various activities and determines the activities that add value to the customer (Roztocki, 2010). ABC System and Competitive Advantages The selling prices, when set too high, may contribute towards minimum sales of the services and lesser number of customers, while, on the other hand, a reduced price for the services rendered may decrease the capability of the company to earn substantial profit on its capital employed which may be threatening its long run survival. It can be said in this context that the ABC system shall provide the company with opportunities for further improvements of services intended towards its diverse customer range. The information obtained through ABC system can be observed as more reliable and accurate compared to the accounting information generated from the traditional means. In addition, the implementation of ABC system enables the employees to understand the various costs involved during the process of delivering services to the targeted customers. ABC system also ensures better understanding of the market needs and subsequently assists the organization in delivering quality services at competitive prices allowing the firm to earn substantial profit from the services rendered to its customers. From an overall perspective, it can be stated that the ABC system has much greater influence on the company’s cost reduction strategies which substantially assists in attaining competitive advantage over its rivals at the marketplace. An efficient implementation of ABC system assists in eradicating non value added costs and enhancing the overall efficiency of the company that facilitates retaining large customer bases rewarding long term sustainability (Leitner, 2007). Impact of ABC System on Service Provided Online than Offline Costing system is considered to be an essential aspect of decision making process for companies involved in online business. The traditional cost accounting is often considered to be incomplete and unprocessed by many enterprises operating actively in the market place. It is in this context that the traditional accounting methods tend to rely more on labor costs with the intention of efficiently allocating indirect or overhead costs for the computation of product or the service costs. However, it has often been noted that the traditional method does not ensure a clear relationship between the costs and the costs objects. Hence, the traditional accounting systems are gradually becoming obsolete and ineffective in the modern global era. Simultaneously, the business has changed over the years, which advocates the evolution of a new accounting system towards determining and allocating overhead costs as the traditional costs accounting methods may not work properly and may be misleading in terms of decision making processes. However, ABC method has provided the online business companies with practical solutions in accordance with many problems associated with the traditional methods such as the accounting of intangible costs and overhead costs when delivering services to the ultimate customers. Contextually, the analysis of ABC system offers online service providers or the companies better control over their costs as it enables the companies to establish consolidated business strategies. The companies engaged in online business activities can therefore attain greater competitive benefits by adopting the ABC system which relies more on the management of principles rather than depending on management-by-intuition (Manalo, 2004). Conclusion In the present scenario of continuously changing business environment, every company is striving to render services and offer products at a reduced price in order to sustain in the market place by preserving its profitability and retaining a large customer base over in the long run. The traditional cost accounting methods were often considered by many companies to be incomplete and a less reliable source for allocating overhead costs on services rendered and the products offered either through online or offline sources. It is in this context that the recent trend depicts a growing number of online customers appealing for quality services and products with cost efficiency. Accordingly, the implementation of ABC shall help these companies to resolve problems associated with traditional methods. Contrary to the traditional methods, the ABC system allocates the indirect costs based on resources consumed during the execution of each activity such as the recording of customers’ orders and the shipment of customers’ orders among others. Stating precisely, assisting in the effective control of production costs on a per unit basis, the ABC system enables the companies to formulate accurate pricing strategies better than their competitors. More importantly, the ABC system enables the companies to distinguish between the value adding and non-value adding activities affording competitive advantages to its users from a long-term perspective. References Leitner, A. (2007). Activity Based Costing. Munich: GRIN Verlag. Manalo, M. V. (2004). Activity based costing (ABC) vs. traditional cost accounting system among Top 500 corporations in the Philippines. CHED Center of Development in Business and Management Education. Morningstar. (2009). Amazon.com Inc AMZN (NAS). Retrieved from http://www.nasdaq.com/MorningStarProfileReports/AMZN_USA.pdf Roztocki, N. (2010). Activity-Based Management for Electronic Commerce: A Structured Implementation Procedure. Journal of Theoretical and Applied Electronic Commerce Research, vol. 5 (1) Shevasuthisilp, S. & Punasathitwong, K. (2012). Activity-Based Costing in the After Press Services Industry. International Multi Conference of Engineers and Computer Scientists, vol II. Read More