Activity-Based Costing (ABC) involves assigning overheads and other related costs to services within the organization. Service companies undertake various activities ranging from planning, logistics, and distribution, which eventually determine the quality of their services. ABC is thus a powerful tool for accurate and effective costing of the organization's activities to avoiding cost distortion and improve efficiency (Mahal & Hossain, 2015). Time is a crucial factor in service organizations due to customer expectations of timely service that beats the traditional delays experienced in ineffective businesses. As such, ABC incorporates cost and time in business activities due to the benefit of business performance and competitive advantage. Furthermore, ABC overcomes the challenge of allocation of irrelevant costs to an activity which usually has the effect of high service costs paid by the consumer. The focus of this paper is on Amazon and how the implementation of an ABC system will impact performance, management decisions, calculation of costs, and competitive advantage.
Amazon
Amazon was founded in 1994 and, at the time, specialized in providing books through online requests, deliveries, and reading (Noe & Weber, 2019). The company eventually leveraged internet growth witnessed over the past two decades to become the leading online retailer in the globe. The company’s headquarters are in Seattle, Washington, although it operates in almost every content providing services such as cloud computing, online marketing, and shopping, cataloging, among others (Noe & Weber, 2019). Various products can be ordered through the company’s websites ranging from simple items like utensils to electronics as well as furniture and fashion accessories. The company targets a range of customers in low, middle, and high-income countries. They target to overcome geographical barriers in shopping by providing shipping services that ensure items reach their customers within the shortest time possible. As such, the online market place is the most widely known and leading revenue earner for the company. Diversification of services ensures that the company meets the various needs of users who visit the website.
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Amazon’s e-commerce model is designed to be user friendly such that visitors to the website can easily access their preferred sections and make orders irrespective of their geographical locations. Precise product information and customer reviews enhance decision making for customers as well as professional displays that make the items clearly visible. Customer tracking on the website allows the organization to use the data to make suggestions and point users to the direction of their preferred items (Noe & Weber, 2019). Often, seasons vary for the e-commerce giant; hence the management at various locations organizes activities according to the prevailing needs. Moving items from the manufacturers to the company’s warehouses and eventually to the customer requires consideration of logistical work and costs. Proper tracking is also necessary to ensure that the customers receive their ordered product at the designated time. Hence, tracking of items and coordination is critical to the success of the services offered by the company.
Implementation of Activity-Based Costing (ABC) At Amazon and Its Benefits
The implementation phase for ABC is the most critical since the associated benefits depend on how well the process is undertaken. Poor implementation can be catastrophic, especially for a company the size of Amazon hence the need for an expert approach. Without a proper understanding of company processes and the management commitment, it becomes almost certain the ABC system will benefit the business. An in-depth understanding of the processes that occur at various departments, including their significance to the overall strategy of the organization for the initial implementation step (Namazi, 2016). The cost driver is the most common method used to tie the costs to the service lines such that the overheads of each activity are known during the implementation.
Owing to the size and number of activities undertaken at Amazon in a single day, it is almost impossible for the full implementation of ABC at the start. The most viable option is a pilot-run that can take place in a single department or service of the company. The pilot-run will provide the opportunity for assessment of the challenges that the company is likely to encounter with a full rollout and come up with measures to cushion the business for unintended consequences. In the case of Amazon, the audio entertainment or the social cataloging services would be suitable for the pilot project since they receive a significantly lesser number of customers as compares to other services like the online marketplace. Once the service is identified, the company can opt for expert services from a consultant who has the necessary experience with ABC implementation. Utilizing the services of an external consultant can offer better undertaking the process internally due to cost issues and the organization’s experience (Kocakulah et al., 2017). Employees also need to be aware of the project to ensure their commitment to the process and achievement of its intended results.
The experts then embark on identifying activities that need revision either due to the high costs of low-profit margins. They determine the causes of irrelevant costs and recommend measures to reduce the costs on these services to make them more effective. At the same time, the consulting firm trains managers and other employees of Amazon on methods identifying and eliminating the unwanted costs for the same activities and others. They also monitor for strengths that boost the chances of success of the ABC and possible areas of failure. The success of the pilot project is followed by a systematic rollout of the entire ABC system in different departments and services using the strategies that made it successful at the pilot stage. Close monitoring is necessary at this stage to identify areas or activities where the implementation process is stalling hence inform decisions to put the implementation back in the right path. It is only when the benefits of the implementation of the ABC become apparent and consistent that the project can be said to be successful.
The ABC system can produce various benefits to Amazon in areas such as its shipping costs, handling of purchase orders during peak seasons, and a significant reduction in its overhead costs. The costs for the company can go up during the holiday season since they have to hire extra workers to handle the large pool of requests from customers. As such, the overwhelming number of orders is likely to reduce performance at the time hence the need for reducing costs for activities to maximize performance at all times. The desire to reduce costs as key to performance improvement at Amazon is crucial for the passage of the low costs to the consumer (Mahal & Hossain, 2015). Reducing shipping costs and other overheads using ABC will significantly improve efficiency in the company.
ABC as a Tool for Providing Competitive Advantage
The e-commerce market place is highly competitive with Amazon facing competitors such as Target, Walmart, Alibaba Group, among others. Complete implementation of the ABC system can help the business to cement further its position as the leading e-commerce organization in the world. The company can attain a competitive advantage by allocating overhead costs determined using ABC to reduce expenses for its costly areas. Furthermore, the tool can be used for testing different designs of meeting the needs of customers and selecting the least costly and most efficient (Desti, 2015). As such, the company can always stay ahead of competitors by keeping costs at a minimum. Furthermore, ABC is a driver for continuous improvement; hence Amazon can utilize it to increase revenues and explore new markets and services that will increase its grip on the global marketplace.
Comparison to Traditional Channels
Traditional costing methods relied on a system of allocation of overheads based on hours of and resources used in providing a service. This system is, however, flawed for the current e-commerce marketplace since it utilizes direct labor costs, while factors such as time and technological efficiency are the critical drivers of activities carried out at Amazon (Namazi, 2016). As a service company, the number of visitors on the website and success purchase orders are some of the factors that account for efficiency. The ABC system will be critical in monitoring the traffic and allocating overheads for the activities. Traditional channels will certainly fail in the current e-commerce marketplace to delays in processing orders and making deliveries. ABC implementation will, therefore, inform better decision making by the government by prioritizing services that are more profitable and in great demand by the customers.
Customers demand quality services and value for their money while making purchases in online marketplaces. While fulfilling these requirements may seem straightforward, there is the critical aspect of company overheads that must be minimized to attain the desired business performance. Activity-Based Costing (ABC) implementation promises increased performance for Amazon since it is an efficient tool for determining overheads direct to each activity. The management thus has the opportunity to revise activities to eliminate unnecessary costs and overall expenses for the business. The overall benefits of ABC for Amazon include less time spent in handling orders, attainment of competitive advantage in the industry, and improved services to customers.
References
Desti, K. (2015). Activity Based Costing (ABC): is it a tool for company to achieve competitive advantage? International Journal of Economics and Finance , 7 , 275-281.
Kocakulah, M. C., Foroughi, A., Stott, A., & Manyoky, L. (2017). Activity-Based Costing: Helping Small and Medium-Sized Firms Achieve a Competitive Edge in the Global Marketplace. J Account Mark , 6 (245), 2.
Mahal, I., & Hossain, A. (2015). Activity-based costing (ABC)–an effective tool for better management. Research Journal of Finance and Accounting , 6 (4), 66-74.
Namazi, M. (2016). Time Driven Activity Based Costing: Theory, Applications and Limitations. Iranian Journal of Management Studies , 9 (3), 457-482.
Noe, C., & Weber, J. (2019). Amazon.com, Inc . https://mitsloan.mit.edu/LearningEdge/CaseDocs/17-183.Amazon.com.pdf
