The current business environment demands companies to track and account for their operations. At the same time, remaining competitive requires employing more expensive costing systems that offer accuracy and efficiency compared to the traditional methods of costing. The activity-based costing system (ABC) identifies all the overhead and indirect costs to related products and services. Unlike the traditional costing methods, activity-based costing acknowledges the relationship between activities, products, and costs and assigns indirect costs to these products (Pushkar, 2019). Minkoff Company, a property damage, and restoration company, boasts streamlining its business processes to achieve speed, efficiency, and quality in serving its clients. A privately-owned company, Minkoff has, over the years, successfully expanded its business operations into other regions through producing consistent and quality results. This report analyzes how the company can implement Activity-Based Costing and its impact on e-commerce services.
Minkoff Company
With over 65 years in providing industrial services to other companies and real estate, Minkoff has excelled in offering restoration services for property damage, fire, water, and other types of damages. Its range of services extends to water extraction, insurance reporting, and structural drying, serving a wide range of clients, including commercial and residential homes (“Our Services,” n.d.). In essence, potential clients contact the company to make significant restoration services as quickly as possible and allowing these clients to resume their normal operations once the restorations are complete. Client companies or residential customers depend on companies such as Minkoff to offer quality services that meet their standards. Given its many years in operation, Minkoff has instilled trust and integrity within its business operations, providing critical services from damage control to insurance claims. As such, achieving such consistency mandates managing costs and fostering a performance-driven approach. While the company employs a different cost estimation method to manage its activities and business practices, the Activity-based costing approach, if adopted, promises to streamline its costing activities further.
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Benefits of Implementing the ABC Method
Competitiveness in the service industry has gained momentum due to globalization and advancements in technology. Like Minkoff, companies strive to provide quality products and services while minimizing their expenses. However, the inability to employ better costing methods impacts a company's efficiency to make more informed pricing decisions. The challenge further attributes to making short-term and long-term pricing decisions, where direct, indirect, and overhead costs make the difference. According to Pushkar (2019), the ABC method of accounting identifies all critical activities that generate costs and keeps track of these activities to completion. For Minkoff, the benefits of using the ABC method to identify and evaluate such activities within its business process are numerous. As earlier noted, the ABC method fosters accuracy and reliability in determining product cost since it focuses on the relationship between cause and effect in incurring costs (Agarwal, 2015). The method will help Minkoff recognize the accurate service cost since it offers diverse services to its clients.
Companies that still use the traditional costing method can only manage to get predetermined overhead rates if the direct labor hours and overhead manufacturing costs are known. Agarwal (2015) notes that determining such values can be challenging for service industries since, on most occasions, they do not have direct costs. More often, service companies only register overhead costs since the services they offer are consumed. Using an activity-based costing method, Minkoff will identify and separate all overhead costs into various cost pools and link them into their constituent services. However, before using the ABC method, the company must undertake a series of activities. First, the company must analyze its services and classify each activity involved in achieving that service. Once identified, the company should assign overhead costs to cost pools attached to specific services. For each cost pool, the activity-based overhead rate should be calculated.
Implementing the activity-based costing by Minkoff will involve identifying all the activities that result in the company's services to its clients. This major undertaking will be beneficial in that it will help the company classify these activities based on the value-adding activities versus non-value-adding ones. At the same time, the company will have to assign overhead costs for all their services using the predetermined overhead rates from the cost pools, and as such, implementing the activity-based costing method will significantly help the company price their services accurately due to the accuracy of their cost information (Agarwal, 2015). When Minkoff manages to link the overhead costs to individual activities, it can accurately make cost and pricing decisions. Moreover, it allows the company to pinpoint services that are profiting the company. Through the costing method, the company can remove those activities and services dragging down the profit margins and prioritize those that are doing well.
Minkoff can reduce its labor costs and increase its profit margins by sub-contracting its services. With the accuracy of cost information through activity-based costing, the company can determine whether in-house service delivery is more profitable than sub-contracting and vice versa. Moreover, the costing method can help Minkoff identify non-value-adding activities that could be eliminated to reduce operational costs while increasing profits. However, Lueg & Storgaard (2017) acknowledge that the energy and time taken to comprehend the cost information in activity-based costing fully cannot be justified, especially if the company offers limited products or services. Regardless of that limitation, activity-based costing can help Minkoff cost control value and non-value adding activities, allowing the management to make better service lifecycle decisions.
ABC System and Competitive Advantage
With the service industry increasingly taking shape, companies providing restoration services face tough competition, and as such, Minkoff should price its services more competitively. A study by Al-Bawab & Al-Rawashdeh (2016) on the ABC system's impact on the pricing of services proved that companies should adjust their product pricing for companies to overcome increased competition from other similar companies to match those in the completion. When property damage occurs, these companies will place their bids to win the contract to perform the restoration services. Competitive pricing makes the selection process hard, and companies have to showcase their work portfolio and track records to outdo the others in winning the contract. Competitive pricing also mandates reducing operational costs to maximize profits. As earlier noted, the activity-based costing system can help Minkoff identify and limit activities with low investment returns.
In this era of the global competitive environment, companies are forced to implement modern business practices that foster sustainability and competitive advantage. Pushkar (2019) acknowledges that managers must examine and evaluate their company's internal processes to determine those set of activities that add value. Increasing the competitive advantage means increasing the value of these activities. Over the past few years, activity-based costing has gained popularity among business managers to increase competitive advantage, providing them with the strategic view of all activities that are critical to the firm. In essence, the ABC system provides strategic benefits to companies by providing the right cost information necessary for strategic decision-making. On the other hand, activity-based costing also provides operational benefits, allowing managers to understand better their services, customers, and cost drivers that drive competitive advantage.
Businesses rely on excellent accounting methods to stay afloat in this competitive marketplace. The activity-based costing approach is well-structured to inform the management of how to streamline production services, reduce costs, and increase business profitability. All these activities are meant to improve overall business performance through strategic management and decision-making. According to Lueg & Storgaard (2017), implementing the activity-based costing method will allow the company to manage its resources, foster inventive habits, and paint a better picture of how the company utilizes its costs. Achieving success through the ABC system will mandate Minkoff to take full advantage of the tools the activity-based approach offers alongside other online marketing tools to promote its brand name and increase its customer base. The emergence of social media as a marketing tool has further linked companies to potential customers, improving both e-commerce and business performance.
ABC System vs Traditional Channels
Today's e-commerce environment presents companies with risks, with these firms experiencing high operational costs than initially anticipated. According to Roztocki (2010), the activity-based costing method was previously implemented by large manufacturing and service firms to replace the traditional costing methods. The motivation behind this replacement was the constant misplacement of allocated costs that significantly impacted decision-making and competitiveness. While the traditional accounting methods had their limitations, they were inexpensive to implement and created no substantial changes in production costs when the overhead costs changed (Roztocki, 2010). Most companies still utilize these methods for external reporting, as they are simple to understand and interpret. More significantly, traditional costing methods are more suitable for firms that produce fewer products or services.
In contrast to the traditional accounting channels, the activity-based system expands the indirect costs and allocates them to specific activities. The traditional channels only allocated the total overhead costs to all products, creating inaccuracies in cost estimation (Woodruff, 2019). The ABC system was created to mitigate these inaccuracies and provide managers with substantial data on profitable activities and those that needed removing. Moreover, the activity-based systems provide management reports that inform the management of the company's internal processes and decisions. Ultimately, the activity-based costing method will play a significant role in e-commerce, allowing managers to understand better its strengths, weaknesses, and competitive edge (Agarwal, 2015). In most cases, companies that still experience losses realize the power of using the ABC system to analyze its costing information and product pricing. With service companies such as banks and hospitals having varying characteristics compared to manufacturing firms, the ACB system can offer better decision-making and cost management metrics.
Conclusion
The activity-based costing method is well-structured to solve inaccuracies posed by traditional systems of accounting. Minkoff, a restoration and property damage service company, can significantly benefit from implementing the ABC system in its accounting process. In essence, the costing method aligns a company's activities and resources to its products and services and their relationship to cost consumption. Unlike traditional costing methods, ABC integrates indirect costs to direct costs to foster better pricing and decision-making. If well implemented, activity-based costing can help managers understand activities that add value to the firm and those that do not. Such insights could eventually drive product lifecycle and process improvement. With e-commerce at the center of competitive advantage, the activity-based costing method allows firms to streamline their business process and gain an advantage over other rivals. Simultaneously, the method improves overall business performance by focusing on activities that add value and increase profitability. In the long run, Minkoff's implementation of the ABC system will boost its revenues and long-term goals.
References
“Our Services”. (n.d.). Minkoff Company. http://minkoff.com/services/
Agarwal, R. (2015). Advantages and demerits of activity-based costing (ABC). http://www.yourarticlelibrary.com/accounting/costing/advantages-and-demerits-of-activity-based-costing-abc/52617/
Al-Bawab, A. A., & Al-Rawashdeh, H. (2016). The impact of the activity-based costing system (A.B.C.) in the pricing of services banks in the Jordanian commercial banks: A Field study. International Business Research , 9 (4), 1. https://doi.org/10.5539/ibr.v9n4p1
Lueg, R., & Storgaard, N. (2017). The adoption and implementation of activity-based costing: A systematic literature review. International Journal of Strategic Management , 17 (2), 7-24. https://doi.org/10.18374/ijsm-17-2.1
Pushkar, I. (2019). Activity-based costing as progressive method of cost management in accounting. Visnik Zaporiz'kogo nacional'nogo universitetu. Ekonomicni nauki , 3 (43), 61-66. https://doi.org/10.26661/2414-0287-2019-3-43-09
Roztocki, N. (2010). Activity-based management for electronic commerce: A structured implementation procedure. Journal of theoretical and applied electronic commerce research , 5 (1). https://doi.org/10.4067/s0718-18762010000100002
Woodruff, J. (2019). Traditional costing vs. activity-based costing. Small Business - Chron.com . https://smallbusiness.chron.com/traditional-costing-vs-activitybased-costing-33724.html
