Customer Profitability
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Introduction
Managers at Stoke plc have been using various teams to collect activity-based data since 2000. Each team has consisted of one or more management accountants working closely with department managers. The teams typically work for 3-6 months on data collection and developing spreadsheets. To date the teams have mainly focused on product costing. Recently two teams have been set up to collect data to improve the company’s understanding of customer-related costs and profitability. One team has looked at distribution costs and the second at order related costs.
Only 3 customers were included in the analysis. Theses 3 customers represent 10`% of total sales. The company has approximately 250 customers in total. Finally the teams only considered labour related costs and direct costs for the cost pools.
The first objective for each team was to estimate the total annual overhead cost and annual volume for each cost driver. As the company only focused on three customers the data was quickly estimated. The second objective was to estimate the percentage of each cost driver per customer.
Collecting Data
The management accept that a ‘cost sampling’ or snapshot’ approach is the best way to identify key activities and their costs. This technique helps the department to develop estimates of how much time is devoted to different activities. Then by using an average hourly rate for all staff managers will be able to estimate the total annual cost of an activity. The decision to use an average hourly rate for all staff will save time.
Managers decided that between 4 to 8 activities should to be identified by each team. The possibility of identifying 20-30 activities was considered but this was rejected because there was very little time to do the work. For the whole exercise it was felt that the information must not take too long to collect and interpret.
Most of the managers involved with the new teams have little experience of collecting data regarding activities and cost drivers. With some activities several cost drivers were discussed. This confused some managers who felt unclear why a cost driver was rejected or accepted. The management accountants believed these problems would not affect the accuracy of the data.
ABC data
Team 1 - Order related overheads
(Data based on 3 customers)
|
Activity cost pool
|
cost driver |
Annual overhead cost for the 3 customers
|
Annual volume for the 3 customers
|
|
Changes to orders
|
Number of order amendments
|
£50,000
|
3,000
|
|
Pre-sales support
|
Number of hours of pre-sales support
|
£100,000
|
3,800
|
|
Post-sales support
|
Number of hours of post-sales support
|
£100,000
|
2,200
|
|
Delayed payments
|
Number of delayed payments over 3 months
|
£70,000
|
1,250
|
|
Order processing
|
Number of orders
|
£60,000
|
20,000
|
|
Invoicing
|
Number of invoices
|
£25,000
|
22,500
|
Team 2 Distribution costs
(Data based on 3 customers)
|
Distribution related overhead costs
|
cost driver |
Annual overhead cost for the 3 customers
|
Annual volume for the 3 customers
|
|
Storage expenses
|
Average cartons in stock
|
£12,000
|
5,000
|
|
Requisition handling
|
Number of requisitions
|
£8,500
|
10,000
|
|
Standard deliveries
|
Number of standard deliveries
|
£5,000
|
3,000
|
|
Special deliveries
|
Number of special deliveries
|
£12,800
|
500
|
Customer sales and activity analysis
|
customer
|
North
|
South
|
East
|
|
Annual Sales
|
£175,000
|
£178,000
|
£173,000
|
The following table summarises the percentage of each cost driver per customer.
|
Customer
|
North
|
South
|
East
|
Total
|
|
|
%
|
%
|
%
|
%
|
|
Number of order amendments
|
20
|
2
|
20
|
100
|
|
Number of hours of pre-sales support
|
16
|
10
|
30
|
100
|
|
Number of hours of post-sales support
|
10
|
15
|
20
|
100
|
|
Number of delayed payments
|
10
|
12
|
10
|
100
|
|
Number of orders
|
10
|
30
|
30
|
100
|
|
Number of invoices
|
20
|
30
|
50
|
100
|
|
Average cartons in stock
|
40
|
30
|
30
|
100
|
|
Number of requisitions
|
30
|
30
|
40
|
100
|
|
Number of standard deliveries
|
10
|
40
|
50
|
100
|
|
Number of special deliveries
|
20
|
60
|
20
|
100
|
Questions
Question 1
Calculate the profit for each customer based on the ABC data and discuss what steps the company should consider to improve the profitability of individual customers.
Question 2
Assume that the company has a complete analysis of all customer-related revenues and costs. Discuss why such data is needed and how it can be used to help a company compete profitably.
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