Activity Based Costing Examples
Activity Based Costing Examples
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Activity Based Costing (ABC) to Improve Accuracy of Product Costing for Financial Services Firm SiteMap

The Challenge

This financial services firm had a wide variety of products. These products could have been originated by them or purchased from other financial institutions. These products had different statuses (e.g., current, delinquent, default, resale). As the industry was becoming more competitive, some national players were focusing on these products, and the government was negatively impacting rates, this financial institution needed to better understand their costs by product, status, and source to assist them with:

  • determining strategy
  • making purchasing decisions
  • managing performance

The Approach

We met with senior management to determine specifically the type of improved costing information that was needed. Employees from cost centers in two locations attended one or two workshops. In these workshops, the employees were given a brief explanation of why the company needed more accurate costing information and what was expected from them. The employees were asked to define their activities. They were asked to either do time studies or estimate what percentage of their time was spent for each activity. Then they were asked to determine how to assign these activities to the various cost objects (i.e. products, source, and status).

This information was loaded into ABC Technologies OROS activity costing package where we were able to extend the capabilities of the software to meet the clients needs by working closely with ABC Technologies.

The Result

As a result of this information, it became apparent that some processes were more expensive than everyone thought. It also gave insights into which products were profitable and which were not. This helped marketing to make pricing decisions when buying loans from other financial institutions. It also helped management better understand that as the ration of loans in different statuses changed, the cost of servicing loans will increase or decrease. It served as a benchmark for comparing results across locations. When the organization decided to consolidate the number of locations that were performing an activity, this information helped them assign activities to those locations with the lowest cost for a particular activity.

Activity Based Management (ABM) for Helping Service Company Better Understand Their Costs

The Challenge

This $500 million plus service organization wanted to better understand the cost of the various services that they were providing to their customers. They were spending millions of dollars on reengineering and did not know what their "as is" and "should be" costs were.

The Approach

This very successful international service organization was providing service without understanding very well the cost of the various services that they were providing. They were spending millions of dollars on reengineering without knowing what those services cost prior to reengineering. We started with the call center and accounting areas. In the accounting areas, we asked everyone to define their activities and estimate the time they spent on those activities. In the call center, we listened to calls recorded by quality to determine the effectiveness of the customer service representative. Calls ranged from 2 minutes to 30 minutes depending on the caller, the customer service representative, and the purpose of the call. We interviewed training, telemarketing supervisors and senior management.

The Result

As a result of our approach, we were able to collect some very useful "as is" information that could be used to compare to the "future state" that would result from the very expensive reengineering effort. In addition, the managers of the area could now better understand not only the times, but also the costs of various activities that they sponsored. This information could be used in deciding whether to approve a major computer system that had little cost savings, but was supposed to improve customer service.

This information was used when the owner of this privately held company decided to sell to a publicly traded organization for estate planning purposes.
 

Activity Based Costing (ABC) to Determine How Much Does It Cost to Service Different Customers? How to Better Price Products and Services?

The Challenge

This company provided back room leasing services to large money-centered banks. Their customers were household names. When a customer called the bank about their lease, they were actually talking to this organization. The organization did everything from processing monthly lease payments, collecting and paying property tax and insurance, making collection calls, and taking necessary legal action to repossess assets that were in default. The problem was the organization did not understand how much each of these services cost. Also, their customers wanted their invoices billed to them as a monthly charge in the form of so many dollars per lease. This meant that customer one may only want monthly processing of lease payments and delinquency calls. Monthly lease payments occurred every month, but delinquency calls were only to delinquent lessors. Customer two might want processing of insurance and legal action to regain property from defaulted lessors. Insurance and property are an annual or semi-annual charge while regaining property from defaulted lessors occurs only if they default. Yet both customers wanted their invoice in the form of a monthly charge per lease rather than in the form of a charge per insurance payment.

The Approach

We started with a two-day workshop with a cross section of people from marketing, finance, and each of the areas of marketing. The president attended the morning portion of the training, and he read our book on Activity-Based Management for Service Industries, Government, and Nonprofit Entities. He supported the ABM effort through-out. We facilitated workshops for each area including marketing, sales, accounting, insurance, property tax, collections, and regaining the property. We calculated the cost of performing these various activities. The results were used to develop a pricing model.

The Result

After talking with marketing and sales, the president and marketing decided that the invoice would still be in the form of so many dollars per month per lessor. However, the monthly invoice would be derived by calculating the unit cost of each separate service (e.g., pay insurance, make collection calls) multiplied by the expected number of times that service was going to be performed. This answer would be summed for all services to obtain a total annual cost. The monthly charge per lessor would be derived calculating the total charges for each customer and then dividing by the total monthly customers for the year. This approach gave the customer an invoice in the form they wanted. This approach helped the organization better understand their costs by service provides as well as by customer which enabled them to focus their marketing to those types of customers and those services that were most profitable.

 

Activity Based Costing in Social Services Agencies

The Challenge

A group of social services agencies was facing reduced reimbursement rates while costs were increasing. They were being asked to provide additional services without additional compensation. Private industry was beginning to provide services that these agencies provided. Many of these agencies were small with revenue of only $1-$20 million.

The Approach

We were chosen over a Big-Six firm because of our experience, our approach, and our price. We worked with a trade association that put together a pilot consisting of 8 different social service agencies. The agencies had to contribute something, but not the full cost of the study. This project was considered so important that the trade association took the balance of our fees from their reserves. The agencies listened to our presentation and competed to participate in the pilot. The eight agencies represented a cross section of size (i.e., small, medium, and large) plus a cross section of social services provided to consumers. These services consisted of transportation, vocational, clinical, day rehabilitation, case management, support services, recreation, and education. The pilot consisted of costing 80% of the total cost of an agency and included intake, billing, and human resources.

A one-day workshop for the pilot with representatives form each of the 8 agencies defined activities for the main services the various agencies and for intake, human resources, and billing. Then the representatives went back to their agencies and ask a sample of employees what percentage of time was spent on each of their activities for the last year. We worked with each of the pilot agencies. They spread non-salary expenses such as phone, computers, and rent to these various activities. They divided their activity costs by the total output volume for each activity to derive activity unit costs. Finally they assigned these activity unit costs to the various services their agencies provided.

The Result

This enables the agencies to better understand the costs of each of their activities. It also helped them understand the total cost of providing different services. They were able to separate the cost of services from reimbursement methods. This was an extremely complicated model because the agencies could perform the same activity for two people yet be reimbursed different amounts because the two people came in under different programs. They could have a program where they were reimbursed from two sources for the same activity. For example, if they provided supervised janitorial services for people who had development disabilities, they could be reimbursed as part of the janitorial contract as well as being reimbursed as part of a social services program. This costing information helped them to remain competitive and make better decisions.
 

Activity Based Costing (ABC) When Internal Customers Complaining They Don't Understand IT Charges and Felt IT Charges Were Too High

The Challenge

A $10 billion service firm had internal customers who were complaining that they did not understand their charges from IT. They felt the charges were too high, and the services provided by IT couldn't possibly cost that much. They had recently outsourced their help desk, but help desk charges were continuing to escalate. They had purchased a faster mainframe that processed faster, but their cost per CPU minute was increasing. Customers were complaining. They has a work ticket system for handling help desk calls, but this was not being utilized to the fullest.

The Approach

Our approach was to help them better understand their costs. First we worked with the area that managed the system for the recording, analyzing, and reporting on their work tickets. We determined all the various activities that were involved in managing such a system. Their activities consisted of: setting up new employees and changing employees connection; answering questions concerning the work ticket software as well as questions concerning the network and printers, customizing the work ticket system reports; updating the Oracle database on which the work ticket system rests. A cross section of the group identified cost drivers (those things that interfere with them doing their job. They created action plans and defined/refined their performance measures.

The Result

The group determined that by having a list of all the activities that were involved in maintaining the work ticket system, their internal customers would better appreciate the cost of providing this service. They estimated the cost of everyone completing work tickets. They could now add the cost of the department providing the work ticket system with the cost of the users of the work ticket system so that everyone would better understand the total cost of such a system. With this cost information, they can discuss with the users: that not filling out work tickets completely, the organization does not gain insights into root causes and frequency of problems so that proper corrective action can be taken. Heavy users of customization should be charged so that they better understand the cost they are causing the organization or at least informed how much each request costs so they can determine if they can justify that costs. The computer security folks should handle passwords to this system along with all the other computer passwords. IT training should perform work ticket system training. They should create a feedback loop between the work ticket system reports and training so that the work system trainers emphasize those common errors of users. They need to explore how to better resolve issues crossing areas (e.g., printer, password, network, mainframe, application)

Call John Antos at 972-980-7407 to find out how Activity Based Costing can help you reach your goals and give your peace of mind

Activity Based Costing A Superior Costing Tool

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