Sample Accounting Analysis for the Electronic Commerce Network

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.

Activity Dictionary

NameDescriptionCost Driver
Customer IdentificationFind potential customersAdvertising expense
Customer QualificationDetermine which customers to pursue (outsourced)# of customers leads
Customer SaleConvince targeted customers to sign the contract# of pursued customers
Business Operations ReviewAnalyze operations of business (outsourced)# of contracts fulfilled
System DesignWrite software and configure hardware# of contracts fulfilled
Implementation and certificationInstall, 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

SalesTechnicianCEOTravelHotelTotal
Rate6505503,6002,000500
Uncertain Quantity952516
Uncertain Total5,8502,7507,20010,0008,00033,800
Certain Quantity5.530.538 
Certain Total3,5751,6501,8006,0004,00017,025

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

TechnicianTravelHotelTotal
Rate5502,000500
Unprepared Quantity21720
Unprepared Total11,55014,00010,00036,100
Prepared Quantity524 
Prepared Total2,7504,0002,0008,750

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 Identification875,000
Customer Qualification (1200 * 175)210,000
Customer Sale (28,767 * 80)2,301,360
Total3,386,360
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
217,175

Recommendations

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 Identification875,000
Customer Qualification (1200 * 400)480,000
Customer Sale (28,767 * 44)1,265,748
Total2,620,748

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.



About The Author


Eric Vanderburg

Eric Vanderburg is an author, thought leader, and consultant. He serves as the Vice President of Cybersecurity at TCDI and Vice Chairman of the board at TechMin. He is best known for his insight on cybersecurity, privacy, data protection, and storage. Eric is a continual learner who has earned over 40 technology and security certifications. He has a strong desire to share technology insights with the community. Eric is the author of several books and he frequently writes articles for magazines, journals, and other publications.

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