Costing (ABC) in Service Industries

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Costing (ABC) in Service Industries

Activity based costing was defined by Cooper and Kaplan as a method of solving problems of traditional cost management systems (Chea, 2011). The traditional cost management systems are the conventional cost accounting systems that are in adequate in identifying the true cost of processes. This poses a problem because it hinders the management and quality professionals’ work in making sound decisions due to the misrepresented data. The ABC system is beneficial to organizations because it assigns costs based on the cost and effect relationships (Chea, 2011). ABC system determines the performance of certain activities in the company. It assesses the amount of resources used to generate  products and to render certain services in terms of the cost incurred. Others refer to the ABC system as the tool used to offer a cross-functional cost view. This is because it gives true insight about spending on services, customers and other activities and assessment of their profitability. (Narong, 2009).

In the service industry, the ABC system is used to provide choice services to customers in the most cost effective way. One way that the banking industry has been using ABC is by providing teller services through either a cash teller or an automated teller machine (ATM). Most customers prefer using an automated teller machine and it is the most cost effective means to provide withdrawal and deposits services for the banks. Service companies use ABC as a tool for growth and increasing profit through identifying and modifying non-value added activities and through improved customer profitability. The banking services industry uses unit costing to calculate the cost of banking services. They calculate the cost and consumption of each unit of output of functions required in delivering the service. After using the ABC system, banks are able to assign accurate pricing to their products and services and determine their most profitable clients. (Kocakullah, Bartlett, & Albin, 2009). Essentially, managers use the ABC system to determine how different activities consume resources or cost services.

Describe the company you researched in one to two (1-2) paragraphs.

The travel arrangements and reservations sector is one of the top online selling services in the US. E-commerce has been facilitated the service through widespread access to fast internet which is either wired or wireless. Many are using mobile computing because of the moderately priced mobile phones that offer internet of very fast speeds. Expedia, Inc. is in the online travel service company established in 1996 and it has a portfolio of the world’s leading travel brands including Expedia.com, Hotels.com, Hot wire and Expedia Cruise ship Centers, which is one of the leading retail cruise vacation experts in North America among others (Expedia Inc, 2013).

Expedia Inc. is involved in a wide array of services in the travel and reservations arrangements for modest and luxury customers. It powers travel booking services for airlines and hotel bookings for nearly 205,000 hotels and hundreds of tour operators, car rental companies, destination service supply partners and airlines (Expedia Inc, 2013). It is the number one online travel company in the globe; it has its headquarters in Bellevue Washington and has 12,300 employees around the world. In 2012, it registered gross bookings amounting to $34bn and revenue amounting to $4bn (Expedia Inc., 2013).

TDABC in Expedia Inc

A time driven activity based costing system (TDABC) is a revised version of the ABC system that simplifies the costing process. This is because it only assesses two kinds of parameters i.e. the number of time units (e.g. minutes) used during the activity related to cost objects and the cost per unit time (Pernot, Roodhooft, & Abbeele, 2007). TDABC is implemented faster and easier than the traditional ABC systems. It is very important in companies that offer round the clock services such as Expedia Inc. in order to determine their unused capacity (Tanis & Ozyapci, 2012).Expedia processes airline bookings and hotel reservations for customers around the clock. Implementing the TDABC system would be very essential in determining the unused capacity for employees who work in shifts.

Unused capacity in the travel and reservations industry may result when employees are available to process the bookings even there may be no customers. It results to instances where the company implements pricing policies that may lead to customer dissatisfaction (Tanis & Ozyapci, 2012). For instance, the TDABC can be used in a scenario where Expedia Inc. may four online booking processing employees working between midnight and 8.00.am. The TDBCA system would decipher the unused capacity from the small number of customers during that shift. On the contrary, in case of an influx of customers the four employees would be too few to sustain an adequate level of service.

The company should use the service durations of business to conduct analysis of unused capacity. For instance, the company has ten customer care attendants that are required to work for two thousand, two hundred and forty hours per month each for eight hours for twenty-eight days. If they spend fifteen percent of their time in wok related training and personal breaks, it means that they spend only one hundred and fourteen thousand two hundred and forty minutes per month attending to actual work (practical capacity). It translates to a capacity cost rate of 85% for each employee. If the amount of time required to serve customers is 33,600 minutes per month, then it means the total amount of unused capacity is 80, 640 minutes. This indicates that instead of having ten customer care attendants, the management should have three of them (Tanis & Ozyapci, 2012).

However, because the company operates for 24 hours in 30 days a month which translates to 43,200 minutes and each employee’s productive time is 11,424 minutes, the company would require 4 attendants (Tanis & Ozyapci, 2012). To get the cost of each minute for each employee, we divide the cost of the supplied service by the employee’s practical capacity. To assign the cost according to TDABC, the time consumed by each customer is multiplied by the number of all customers and then divided by the capacity cost rate (Hajiha & Alisha, 2011).

The TDABC system would be useful to the company to make decisions on staffing. It would be able to cut down on costs where the staffing may be more than the number required and vice versa. This would increase efficiency of the business through cost cutting. It would be beneficial because the savings made would be channeled to customers in discounts and lower prices as compared to competitors in the same industry thereby giving the company a comparative advantage based on pricing. On the flip side, if the TDABC system results dictates more staffing, it would be beneficial to the company in improving efficiency, as customers would be attended to in a more prompt way. This would increase customer satisfaction and generate satisfied repeat customers. This is in appreciation that companies spend far much more in finding a new customer than on retaining an existing customer. Customer satisfaction leads to repeat customers who continuously contribute to the company’s revenue and profit in the long run. This is because the company may not have to spend much on expensive marketing campaigns.

ABC system for competitive advantage and performance

Companies are increasingly dependent on high quality information for decision-making. This is as a result of growing competition. They require information about profitability of products and services and the cost incurred in the different activities within the company. ABC divides work into activities that are assigned certain cost estimates. The estimates factor in resources such as labor, materials, equipment, subcontracting costs and overhead for each activity (Bogdanoiu, 2009)

Activity based costing reveals the total unused capacity and allows companies the opportunity to eliminate the unused capacity which reduces costs. Companies that use the ABC system have the opportunity to identify inefficient or unnecessary activities and opportunities for cost reduction and thus increase profit. It is important that the expenses for different services and products are separated and matched to the level of activity that consumes different levels of resources. This separation is important in determining pricing for the different payers. ABC allows employees to learn about the various costs involved and they are then able to make decisions about which activities add value and those that do not add value. From here, they make improvements that lead to increased efficiency (Bogdanoiu, 2009).

Increased efficiency allows the companies to serve the market need better with better quality products that are competitively priced. It allows the managers to improve efficiency and reduce the cost of certain deserving products and services. The company is able to have an internally built competitive advantage where it continuously adds value to the product and service for its customers. It also ensures that they are priced fairly because products and services are not charged for resources that they did not use. Fair pricing and improved services are strong determinants of companies competitive advantage in the industry. It would also place the company in a better position to get more revenue and profit from increased sales.

TDABC in e-commerce and in non-e-commerce companies

The TDABC system for online services presents a better opportunity to assess time efficiency because of the new technology that incorporates features that measure the amount of time spent on a task such as in a call center. In an online customer care setting, it easier to track the employees’ performance because of interaction with technology that measures how much time is spent on a certain task. This is opposed to a traditional setting where the company many have several stands where the customers approach the attendants physically. The interaction is physical and an estimation of actual time sent on the activities may be misrepresented. Activities conducted online allow management to gather accurate information about efficiency as compared to the traditional offline service approach (Chea, 2011). When TDABC is used for online services, the impact is that it increases the chances of making accurate decisions as opposed to manual data collection. In traditional forms of making hotel reservations and bookings for airlines, there is more time involved when offering the customers niceties such as greetings and welcoming them. The TDABC system implemented in a traditional reservation system would indicate that the company incurs more expenses as compared to an e-commerce setting.

In the e-commerce system, customers will read the information provided on the website about the particular service they are interested in as opposed to asking for oral information from an attendant. The time spent by the attendant in explaining the information regarding different services on offer in a traditional setting is saved through e-commerce because the customer reads the information online without engaging an attendant. Additionally, when the customers visit the website and places a reservation, the attendant has not spent time in welcoming and greeting the customer as opposed to if the customer went to the company to meet the attendant to make the reservation. E-commerce presents an opportunity for companies in the travel and reservations sector to make large savings on personnel remuneration. This is because it requires a considerable less amount of time to process a reservation made online as compared to one made through the customer physically engaging a travel or hotel advisor. The TDBCA system in the e-commerce system would be that it points out opportunities to maximize on profitability because of the ability to serve more customers.

For management in the reservation services offered using traditional methods, the TDABC system would be an eye opener. This is because they would be able to calculate the number of staff that would require be dismissing or adding in order to serve the customers better. This is because the TDABC system indicates the productive capacity of all the personnel involved in making reservations in terms of the cost of the service in comparison to the time spent. It allows managers to conduct accurate assessments of personnel’s productive capacity. It then assists them to assess their performance and gives them the framework of setting performance targets for the employees in the company.

For the management in the e-commerce reservation business the TDABC system assists the managers to make decisions about expansion. In e-commerce, the customers do not require to visit any physical premises to make reservations. This presents a good opportunity for the company to expand based on the results of the TDBCA. In case the system indicates there may be need to increase demand, the company may only need to make more acquisitions. It may also launch strategic marketing campaigns to address the excess unused capacity.

Accommodating the unused capacity in a traditional non-e-commerce business approach is harder to achieve than in an e-commerce approach. This is because a non-e-commerce approach may require more expenses in setting up a physical location and the necessary facilities required in a reservation premises. On the contrary, an e-commerce system may only simply require increasing demand for services to make use of the unused capacity. Managers in  the two different settings get slightly different results from the TDABC and hence require different strategies to ensure efficiency.

Indeed the BCA system presents a myriad of benefits for companies in the industry services. This is because the system assesses the cost of the activities that the personnel undertake. The personnel are then empowered to continuously add value to the services for greater efficiency in terms of the cost of the activities. It is important for managers to understand how time, activities and their cost impact on the company’s profitability. They should only sustain the level of personnel and activities that add value to the customer expectation in regards to pricing and the general customer experience.

References

Bogdanoiu, C. (2009). Activity Based Cost From the Perspective of Competittive Advantage. Journal of Applied Economic Sciences, 1(7), 5-12.

Chea, A. C. (2011). Activity Based Costing System in the Service Sector: A Strategic Approach for Enhancing Managerial Decision making and competitiveness. International journal of Business Management, 6(11), 3-11.

Expedia Inc. (2013). Expedia Inc. Retrieved July 19, 2013, from Expedia Inc: http://www.expediainc.com/

Expedia Inc. (2013). Company Facts & History. Retrieved July 19, 2013, from Expedia Inc.: http://www.expediainc.com/company.cfm

Hajiha, Z., & Alisha, S. S. (2011). Implementation of time driven Activity-based Costing System and Customer Profitability Analysis in the Hospitality Industry: Evidence From Iran. Economics and Finance review, 57-67.

Kocakullah, M., Bartlett, J., & Albin, M. (2009). ABC for Calcultaing Mortgage Loan Servicing Expenses. Cost Management, 23(4), 36-44.

Narong, D. (2009). Activity BAsed Costing and Management Solutions to Traditional Shortcomings of Cost Accounting. Cost Engineering, 51(18), 11-18.

Pernot, E., Roodhooft, F., & Abbeele, A. V. (2007). Time Driven Activity BAsed Costing for Inter Libarary Services: A Case Study in A University. Journal of Academic Libranianship, 33(5), 551-560.

Tanis, V. N., & Ozyapci, h. (2012). The Measurement and management of Unsed Capacity in a Time Driven Acitivity Based costing System. Journal of Applied Managemnt Accounting Research, 43-57.

 

 

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