Database Reference
In-Depth Information
Similarly, to build up activity-based customer costs, the total for a customer (or a group) would
be the sum of
Activity-based productcosts
volume-dependent customer costs(e.g.,
packagingmaterials or cost of delivery )
variable cost driver-dependent overheads
+
M
M
∑
∑
{
}
=
Activity-based customer costs
{
}
l
+
l
l
=
1
l
=
1
ABC provides the basis to understand product and customer profitability and allows the man-
agement to make decisions both on positioning and capability—the twin pillars of BPM. The
understanding of product and customer costs that comes from using ABC provides its real value
when the revenue resulting from the total activity within a business area is related to the costs of
achieving that revenue.
It is usually possible to trace revenue to customers only if the enterprise operates a billing
system requiring customer details or if there is in place a membership scheme like a store card or
loyalty program. Costs vary from customer to customer on account of
◾
Customer acquisition costs
: Sales calls and visits, free samples, engineering advice, and so on
◾
Terms of trade or transaction
: Price discounts, advertising and promotion support, extended
invoice due dates, and so on
◾
Customer service costs
: Handling queries, claims and complaints, demands on sales person
and contact center, and so on
◾
Working capital costs
: Cost of carrying inventory for the customer, cost of credit, and so on
If an enterprise wants to assess which of its customers are profitable, it has to be able to trace costs
as well as revenues to the customers (see Chapter 15, Section 15.7 “Customer-Centric Activity-
Based Revenue Accounting (ABRA)”). In Chapter 15, Section 15.3 “Economic Value Added,” we
look at the EVA concept for assessing performance of responsive enterprises.
1.2.2.3.2 Time-Driven Activity-Based Costing (TDABC)
The conventional ABC systems had many drawbacks in that they were expensive to build, com-
plex to sustain, and difficult to modify. Their reliability was highly suspect as the cost assignments
were based on individuals' subjective estimates of the percentage of time spent on various activi-
ties. It also made unrealistic assumptions like
◾
Identified activities (e.g., processing customer's orders or inquiries) take about the same
amount of time without any variations for particular circumstances
◾
Resources work at full capacity without discounting for idle or unused time
Moreover, implementing an ABC system for realistic enterprise scenarios (a few hundred activi-
ties, few hundred thousand cost objects, and time duration of a couple of years) quickly ended up
confronting computational challenges of gargantuan proportions requiring huge computational
resources that were beyond the capabilities of normal enterprises. Because of the subjectivity,
time-consuming surveying, and data processing costs of ABC systems, many enterprises either
