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¶ … ABC (Activity-Based Costing) system to assist Towels & More (T&M) management identifying the type of customer to focus out the three types of customers that the company is supplying its products. The T&M is a small and family company specializing in selling towels. The company sells its towels to three different types of stores that include Departmental Stores, Gift Shops and Specialty Retailers. Based on handsome revenues that the company has recorded over the years, the Chief Executive Officer (CEO) decides to expand the business. However, the small gift shops deliver the highest contribution margin, and the CEO is convinced that the gift shops are the appropriate retail outlets to pursue. The paper calculates the distribution costs and customer support assigned to the T&M's three types of customers to assist in the evaluation of the ABC technique for a customer selection.
Cost Allocation for the Three Categories of Customers Of orders places
The cost analysis for the three type of customers is presented in Table 1 that shows the costs assigned to Department stores is 100% higher than the costs assigned to Specialty Shops, and Gift Shops. The major reason is that the total sales units of the Departmental Store are 100% higher than the sales units of Specialty Shops, and Gift Shops. Thus, the total costs for orders placed, sales calls and No of shipments for Departmental Stores are 100% higher than the total costs for Specialty Shops and Gift Shops. The total sales units for the three types of customers are 20,000. The calculation is presented below:
Departmental Stores
Specialty Shops
Gift Shops
Sales (units)
10,000
5,000
5,000
Total costs/No. Of orders places
(10,000/20000)*40.000
=20,000
(5,000/20000)*40.000
=10,000
(5,000/20000)*40.000
=10,000
Total costs/No. Of sales calls
(10,000/20000)*80,000
=40,000
(5,000/20000)*80.000
=20,000
(5,000/20000)*40.000
=10,000
Total costs/No. Of shipments
(10,000/20000)*120,000
=60,000
(5,000/20000)*120.000
=30,000
(5,000/20000)*40.000
=10,000
Table 1 below allocates costs on each of the three types of customers.
Table 1: Cost Analysis
Department Stores
Specialty Shops
Gift Shops
Total Customer Support & Distribution Costs
Activity Level
Activity Level
Activity Level
Sales (units)
10,000
5,000
5,000
Revenues
$200,000
$100,000
$300,000
Total costs/No. Of orders places
$20,000
$10,000
$10,000
$40,000
Total costs/No. Of sales calls
$40,000
$20,000
$20,000
$80,000
Total costs/No. Of shipments
$60,000
$30,000
$30,000
$120,000
Total Costs
$240,000
Recalculating the Cost Allocation using ABC
The paper recalculates the costs using ABC technique based on the information in the Table 1.
Table 2
Department Stores
Specialty Shops
Gift Shops
Total Customer Support & Distribution Costs
Activity Level
Activity Level
Activity Level
Total costs/No. Of orders places
$20,000
$10,000
$10,000
$40,000
Total costs/No. Of sales calls
$40,000
$20,000
$20,000
$80,000
Total costs/No. Of shipments
$60,000
$30,000
$30,000
$120,000
Total Costs
$120,000
$60,000
$60,000
$240,000
Revenues
$200,000
$100,000
$300,000
$20,000
$10,000
$10,000
$40,000
Total costs/No. Of sales calls
$40,000
$20,000
$20,000
$80,000
Total costs/No. Of shipments
$60,000
$30,000
$30,000
$120,000
Total Costs
$240,000
Contributing Margin
$360,000
Contribution Margin "less customer support and distribution costs" for the approach 2 is presented in the Table 4 below.
Table 4
Department Stores
Specialty Shops
Gift Shops
Total Customer Support & Distribution Costs
Activity Level
Activity Level
Activity Level
Total costs/No. Of orders places
$20,000
$10,000
$10,000
$40,000
Total costs/No. Of sales calls
$40,000
$20,000
$20,000
$80,000
Total costs/No. Of shipments
$60,000
$30,000
$30,000
$120,000
Total Costs
$120,000
$60,000
$60,000
$240,000
Revenues
$200,000
$100,000
$300,000
$600,000
Traceable and Allocated Costs (Total)
$120,000
$60,000
$60,000
$240,000
Contributing Margin
$80,000
$40,000
$240,000
$360,000
Contributing Margin Ratio
22%
11%
67%
Based on the information in the Table 4, the report recommends that the company should support customer of the Gift Shops because the company realizes $240,000 contributing margin from the total contributing margin, which is 67% of the total contributing margin. The Fig 1 reveals the illustration of the contributing ratio for all the three type of customers, and based on the information in the Fig 1, the company should pursue Gift Shops customer because the company is realizing bulk of its profits from this category of customer than other two types of customers.
Characteristics of companies Benefiting from an ABC allocation System
Different types of company can benefit from ABC allocation system. First, a company producing two or more type of products can benefit from the ABC allocation system. "Arguably, product diversification has been a major contributing factor into the management accountant's pursuit of alternative costing devices like ABC." (Walther, 2012 p 18). In the contemporary business environment, many manufacturing companies are specializing in different type of products. However, ABC allocation system will assist this type company to identify which product out of all its products delivering the highest contributing margin. By allocating the costs system to different type of products produced in the company, a company will be able to understand which products to pursue and the products to drop. Companies such as Microsoft, Hewlett Packard, Samsung, and other companies that produce multiple products will benefit from implementing ABC cost allocation system.
Moreover, companies having different categories of customers can also benefit from ABC allocation system. In the present competitive business environment, organizations…
Reference
Garrison, R.A. Noreen, E.W. & Brewer, P.C. (2008). Managerial Accounting (12th Edition). New York. McGraw-Hill/Irwin.
Walther, l. (2012). Chapter Twenty. Process Costing and Activity-Based Costing. Retrieved (including video lecture) Retrieved 16 May 2014 from http://www.principlesofaccounting.com/
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