Analyzing product and customer profitability:(Time-Driven) Activity Based Costing
Activity Based Costing (ABC) is an alternative to the traditional way ofaccounting. Traditionally it is believed that high volume customers are profitable customers, a loyal customer is also a profitable one, and profits will follow a happy customer. Studies on customerprofitability have unveiled that the above is not necessarily true. ABC is a costing model that identifies the cost pools, or activity centers, in an organization and assigns costs to products and services(cost drivers) based on the number of events or transactions involved in the process of providing a product or service. As a result, Activity Based Costing can support managers to see how to maximizeshareholder value and improve corporate performance.
Historically, cost accounting models related indirect costs on the basis of volume. Typical benefits of Activity-Based Costing (also: 'ActivityBased Management') include:
Identifying the most and least profitable customers, products and channels.
Determine the true contributors to- and detractors from- financial performance.
Accurately predict costs, profits and resource requirements associated with changes production volumes, organizational structure and resource costs.
Easily identify the root causes of poor financialperformance.
Track costs of activities and work processes.
Equip managers with cost intelligence to drive improvements.
Facilitate better Marketing Mix
Enhance the bargaining power with thecustomer.
Achieve better Positioning of products
With the costing based on activities, the cost of serving a customer can be ascertained individually. Deducting the product cost and the costto serve each customer, one can arrive at customer’s profitability. This method of dealing with customer cost and product cost separately has lead to identifying the profitability of each customer...