For service-based companies to better ascertain and serve the most profitable customers, the company should employ activity-based costing (ABC). To effectively apply ABC, the company will need to determine which of its products are more profitable, which product/services should be emphasized, the product/service profitability trends over time, and the product/services costs based on the setting prices. Costing in the services industry is a forward-looking endeavor (Kucera, 2019). ABC is a good forward analysis tool beneficial for services providers such as financial, healthcare, and insurance service providers.
ABC can benefit from customer profitability analysis for an effective outcome. Customer profitability analysis will identify individual customer’s profitability to the organization. For instance, a bank looks at the various activities involved in service delivery to customers to determine which services are more profitable and which customers provide more value for the services.
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Costs are not driven by the number of customers rather by the transaction processes. The costing cannot be based on volume. Users pay the costs of the services they use, but they may not share the costs evenly ( Blocher, 2018). Service providers ought to split services delivery into profit centers and create a suitable inventory of services for each profit center while defining all product and non-product actions at the centers. Non-product-related undertakings must be divided into tasks with unit-specific importance and tasks that have organization-wide implications (Hashim, 2019). The non-service specific costs are spread across all products.
The service provider can now direct more product-specific funding to profit centers that cater to the most profitable customers or provide the most profitable service demanded by the most profitable customers. Such product-specific activities may include direct marking of profitable services and profit centers to the profitable customers.
Peer Response
Hello Adaora Azubike,
Thank you for sharing. I concur with you that activity-based costing is the most appropriate cost approach for costing in the service industry. I agree with your thought on how to apply activities-based costing in the service industry. The method was first developed for the manufacturing industry. It thus needs some adaptation to operate in the service industry effectively. However, once adopted a particular service delivery scenario, it is very effective at ensuring the most profitable customers are properly served and drive the profitability to the business.
Reference
Blocher, E. (2018). Cost Management: A Strategic Emphasis . [Strayer University Bookshelf]. https://strayer.vitalsource.com/#/books/9781260165265/
Hashim, J. H. (2019). Activity Based Costing (Abc) Model for Higher Education Institutions: A Basic Guide to the Model Development . Partridge Publishing Singapore
Kucera, T. (2019). Application of the activity-based costing to the logistics cost calculation for warehousing in the automotive industry. Communications-Scientific letters of the University of Zilina, 21 (4), 35-42.
