Activity-Based Costing ABC in Service Industries

Activity-Based Costing in Service Industries

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

Since many traditional industries that deal with goods for sale also offer some service, it was somewhat difficult to settle on a company that dealt in services exclusively. Home Depot or another of that sort would have been easy because they offer both, but the company used for this examination was State Farm. Insurance companies will sometimes offer real products to their customers, but the main product is insurance and State Farm is recognized as the largest seller of insurance of individual automobile insurance in the United States.

The company began selling insurance in 1922 and worked primarily with homeowners in the cities and in the country. The company did work with automobile owners, but because no laws had been passed at the time to require automobile owners to have any form of insurance, it was not a large part of the business. The company was started by G.J. Mecherle who was a retired rancher who wanted to help his neighbors retain their wealth (State Farm, 2012). Almost immediately though, the focus of the business turned to automobiles. The reason for this was that people did not have any means to make insure that particular investment. Mecherle worked with two other people to set up that first office. Now, the company has more than 17,000 agents assigned to a large number of local offices. The company has been so successful offering its services since that time that they have opened the State Farm Bank which serves the needs of its customers, as well as a roadside assistance business and a comprehensive website.

2. Discuss how a time driven ABC cost system can be implemented in the company you researched and the benefits that the use will yield to the business performance.

first of all, it makes sense that activity-based costing would be used in a service industry because it provides a clearer picture of the product that is being sold. Each activity that is being performed by an employee of the company can be broken down into a specific activity and assigned a value based on the specific activity rather than the product that consumes the activity (Szychta, 2010). This assignment can be based on the time it takes to perform the activity and this is preferable because it provides a better bound to the specific item. For example, a mechanic whose primary service for his dealership is the exclusive brake changer for that dealer. The company has assigned a time constraint regarding how long it should take to complete a brake job, and they pay a certain amount for that work. Whether the mechanic performs the service faster or slower, the individual receives the same amount for each brake job completed. The accounting for the individual jobs the mechanics complete for the dealer is made simpler because it is now a constant.

State Farm is an insurer whose agents perform specific tasks during their work day, but it is difficult to quantify exactly what the agents do. Therefore, it makes sense that State Farm would group a certain type of activity into a single group that can then be accounted for. These activities will be assigned a reasonable time for completion which will provide the employee some guidelines, but it will also allow an accounting department to streamline their business also.

As far as performance, this type of accounting is ideal because people need to understand the bounds within which they are to operate. The system would take a particular group of activities that a person does in performing a task. The benefit to the employee in this is that normally they would work at a certain pace that may or may not provide a benefit to the company. The time-driven activity-based costing allows the employees to see what they should be doing, according to the company, and allows the company to better evaluate the value o their employees based on the tasks they are able to perform. So, the benefits of the system are for both the employer and the employee.

3. Assess how using an ABC system can provide a competitive advantage to the company in the market space it operates and the resulting impact to the business performance.

According to the Value Creation Group (2010), an industry researcher, there are many advantages to activity-based costing that can far outweigh the disadvantages if used properly. Once the system is established, it is simpler to understand by both employees and the employer. The employees know exactly what is expected when they are performing various services, and the employer is better able to evaluate performance. The one issue is that the data for such a system can be more difficult to gather, but it is more worthwhile once it is completed.

The reason that this costing system provides a competitive advantage is that it allows the employer better control over the time that its employees are at work. Activity-based costing is an advantage for the employee because it clearly explains what is expected, and it will also produce more efficiency in the worker. One of the major advantages of the process is that it "makes visible waste and non-value added processes. For example, if State Farm implements this system and incorporates several smaller activities under one umbrella (discussing policy with the customer, writing it up, filing it), then they can see areas where they can streamline the process. It may be that this particular activity takes the average worker far less time than was originally allowed. This means that the employer can look at the activity and determine what a more accurate time stamp is. It can also help the employer notice elements of a particular activity that are slowing down delivery of the service, so that the time required can be modified, or the employer can create a new category if needed. The competitive advantage comes in the ability to make the company more efficient quickly.

4. Examine the potential impact of time-driven ABC costing on services provided online with those provided through traditional channels, considering how this knowledge will impact decisions made by management about these services

Most service providers can now use the internet to reach more customers. Using State Farm as an example, a customer that lives in a more rural area is better able to connect with an agent if they need the assistance of an agent or if they need to purchase a policy. The online environment gives State Farm a greater amount of flexibility than they could have had before. It allows them to reach customers that they could not have reached previously.