Objective: This case provides practice in Activity-Based- Analysis (ABC) calculations for a service company. It also highlights the important considerations in moving from ABC to Activity-Based Management (ABM) and further into Strategic Cost Management (SCM) so as to influence customer behavior and profitability.
Q1. Using the information in Exhibit 2 calculate ABC based service costs for the TFC distribution/warehouse services. These are some broad steps that can help. 1. Step 1 – Use Distribution Center Activity Analysis in the text (p. 30) and determine the cost (activity) driver for each of the activities in page 31. 2. Step 2 – Calculate the warehouse/distribution cost per unit of activity driver for the same six activities. 3. Step 3 – What does the unit cost per activity represent? Are the committed (fixed) vs. (discretionary) in the long vs. the short run
Q2. Use the new warehouse/distribution activity costs and calculate the distribution/warehouse services costs for customers A and B. Here are the steps that one has to undertake. 1. Step 1 – Determine the activity drivers consumed by each customer (see Customer Profitability Analysis in the text of the case for the needed information) 2. Step 2 – Reassign the distribution/warehouse costs to customers A and B based on the activity drivers consumed multiplied by the activity rates calculated in Q1 3. Step 3 – Reallocate or directly trace the remaining costs such as Inventory financing etc. to customers A and B. 4. Step 4 – Add all the reassigned traced and direct costs of services to obtain a more accurate complete cost of serving customers A and B
Q3. Compare “Old” costs of serving clients A and B to the ABC “new’ costs calculated in Q2. Use this comparison to make inferences about the relative profitability of customer A vs. customer B
Q4. Should it implement the “New” service based ABC costing system? Consider the following...