Dave Roger created the Electronic Commerce Network (ECN.W) 18 months ago to solve the problem of internet transaction processing. Due to a lack of talent in the industry, IT personnel with experience with transaction processing were in high demand. In order to save companies money, ECN.W provides transaction processing for clients so that they do not have to go to the expense of hiring experienced IT personnel.
ECN.W is seeking additional capital in the way of loans, but the new investors require more information in order to grant these loans. Specifically, they would like to see an activity analysis to break down the costs of doing business. Let’s explore this sample case for those trying to do a similar analysis.
|Customer Identification||Find potential customers||Advertising expense|
|Customer Qualification||Determine which customers to pursue (outsourced)||# of customers leads|
|Customer Sale||Convince targeted customers to sign the contract||# of pursued customers|
|Business Operations Review||Analyze operations of business (outsourced)||# of contracts fulfilled|
|System Design||Write software and configure hardware||# of contracts fulfilled|
|Implementation and certification||Install, test, and certify new system||# of contracts fulfilled|
Training costs per person
Sales 25,000 / 2 people = 12,500 / 250 = 50 per day
Tech 157,500 / 9 people = 17,500 / 250 = 70 per day
Costs per day (including training and benefits)
Sales 500 * 1.2 for benefits = 600 + 50 training costs = 650
Tech 400 * 1.2 for benefits = 480 + 70 training costs = 550
CEO 3000 * 1.2 for benefits = 3,600
Customer Sale Activity
Since 70% of targeted customers were classified as uncertain, the totals for each customer were weighted accordingly and averaged together to get the cost for this activity.
Activity cost estimate for Customer Sale
$33,800 * 70% of customers = $23,660
$17,025 * 30% of customers = 5,107
$28,767 customer sale activity cost
Implementation and Certification
In coming up with these figures, the cost for the certification had to be determined. Certification requires one technician for the day. This technician remains at ECNW, so there are no related travel or hotel costs associated with accreditation. Prepared customers required one day for accreditation, so one day worth of technician salary is added on. For the unprepared customers, two days worth of technician salary was added on.
A ratio of prepared to unprepared customers was not given so they two totals were averaged together to get the total activity cost.
Activity cost estimate for Implementation and Certification
$36,100 + 8,750 = 44,850 / 2 = $22,425
|Customer Capture cost estimate|
|Customer Qualification (1200 * 175)||210,000|
|Customer Sale (28,767 * 80)||2,301,360|
|Customer Loading cost estimate|
|Business Operations review (3600 * 7)||25,200|
|System Design (5000 * 7)||35,000|
|Implementation and Certification (22,425 * 7)||156,975|
The data collected shows that the customer sale activity consumes the vast majority of the cost for the customer capture process. Managers might be able to reduce the amount spent on consumer sales by increasing the amount dedicated to customer qualification. They may need more people to do a better analysis of the data purchased from the credit agency. Another approach would be to purchase additional information on each customer to make better decisions. The costs for each inquiry would go up but cutting back on the 87.5% of customers who do not result in a contract would save the company money overall.
Sample figures and assumptions:
Additional information cost: $400
Increase in decision-making ability: 45%
80 potential customers decreased by 45% gives 44 potential customers. It is assumed that these 44 potential customers will also result in 10 signing contracts.
|Customer Qualification (1200 * 400)||480,000|
|Customer Sale (28,767 * 44)||1,265,748|
Due to better customer qualification, the number of potential customers was reduced. This saved $765,612 from an investment of $270,000 in customer requirement. These figures are artificial, but it does show that ECNW should research cost savings in this area.
Another concern is how this information is going to be used. It appears that the only reason Dave Roger wants this information is to receive capital from investors. If this is the case, most of the effort put into creating this data was wasted. This analysis could be used to price services better, plan organizational growth, allocate budgets, and streamline operations. Dave Roger must firmly stand behind the ABC system and support its integration within the company for it to be successful. Denise Pizzi has started out on the right track by creating a cross-functional team. This gives each department a say in the analysis and creates initial support across the company for the project. Through activity based costing, ECNW could get new investors and improve productivity.