Allied 2

8/3/2019 Allied 2

1/14

AOP 1

ABCSeven Steps

1) Define activity cost poolsthe value chain steps

2) Assign costs to the pools3) Determine the driver(s) for each pool

4) Measure aggregate activity units for the driver(s)

5) Divide costs (step 2) by driver units (step 4) to getcost per driver unit

each cost pool

7) Activity-based cost for the customer equals: costdriver units (step 6) x cost per driver unit (step 5),summed across all cost pools

8/3/2019 Allied 2

2/14

AOP 2

Steps 1 and 2

Storage... Stock Selection... Data Entry... TOTAL

Salaries

Fringe BenefitsRent

Depreciation

TOTAL $1550 ... $5,700

STEP 1 Define the Cost Pools (The Value Chain Stages)

STEP 2 Assign Costs to the Cost Pools

8/3/2019 Allied 2

3/14

AOP 3

Steps 1 through 5

(1) (2) (3) (4) (5)

Value-Added Total FY92 Cost Cost DriverActivities Expense per Driver Units Service

Defined as: Activity (000) Defined FY92 Plan Costs

Storage $1,550 Cartons in Inv. 350,000 $4.44

Requisition Handling $1,801 Requisitions 310,000 $5.81Warehouse Activity $761 Req. Lines 775,000 $0.98

Pick Packing $734 (PP) Lines 700,000 $1.05

Data Entry $612 Req. Lines 775,000 $0.79

Desk Top Delivery $250 Per Time ~8,500 $30.00$5,708

Freight Charge Actual Cost

Inventory Finance Inventory Value Capital Charge*

8/3/2019 Allied 2

4/14

AOP 4

Ste 6A Sa a of Two CustomersCustomer A Customer B

Annual Revenue $79,320 $79,320Re uisitions 364 790Requisition Lines (all pick pack) 910 2,500Average Inventory at the

Centers Cartons 350 700$ $15,000 $50,000

Per carton Cost $43. $71.Average Revenue* $68. $113.

Shipments Number 52 156Desk Top 0 26Freight. $ $2,250. $7,500

re g t/ pment 43. 48*Cartons shipped

= $50,000 $43 = 1,163 cartons. Revenue of $79,320 1,163 = $68. (A), . , .

8/3/2019 Allied 2

5/14

AOP 5

Step 7Customer A Customer B

Storage 350 Cartons 700 Cartonsx $4.44/carton x $4.44/carton

$1,554 $3,108Requisition Handling 364 requisitions 790 requisitions

x $5.81/requisition x $5.81/requisition$2,115 $4,590

Warehouse Activity 910 lines 2500 linesx $.98/line x $.98/line

,

Additional "Pick Pack" Charge910 pick-pack lines 2500 pick-pack lines

x $1.05/line x $1.05/line,

Data Entry 910 lines 2500 linesx $.79/line x $.79/line

719 1,975

8/3/2019 Allied 2

6/14

AOP 6

tep 7 ontinued

Customer A Customer B

Desk Top Delivery 0 times 26 timesx $30/time x $30/time

$0 $780

Freight Out (Actual) $2,250 $7,500

Inventory Financing $15,000 inventory $50,000 inventory. . .

$2,025 $6,750

Inactive Inventory Surcharge $0 inventory $7,000 inventoryproxy or o so e e nven ory x . x .

cost borne by TFC) x 3 months x 3 months

$0 $315

Total Service ChargesABC Basis $10,510 $30,093

8/3/2019 Allied 2

7/14

AOP 7

AnalysisOld Method Customer A Customer B

Sales $79,320 $79,320

Product Cost (50,000) (50,000)Service Fees (32.2% of

product cost) (16,100) (16,100)Gross Profit $13,220 $13,220

ross ro

Activity-Based Analysis Customer A Customer B

Sales $79,320 $79,320

Product Cost (50,000) (50,000)Service Fees (per ABC) (10,510) (30,093)Gross Profit $18,810 (773)Gross Profit % 24% Negative

Which is the better customer?

8/3/2019 Allied 2

8/14

8/3/2019 Allied 2

9/14

AOP 9

Customer B now shows losses. But, they are

TFC offers. Of course, they may only like it

as long as they dont have to pay for it!So Customer B really uses the services TFC

offers but the dont a for them.

Customer A is very profitable for TFC, butthey dont use much of the service which isthe basis for TFCs business.

8/3/2019 Allied 2

10/14

AOP 10

Moving From Analysis to Action

Marketing Strategy Decisions

Pricing

"Value-Engineer" The Cost Structure

8/3/2019 Allied 2

11/14

AOP 11

Marketing Strategy Decisions r c n g

SBP Pricing (Services Based Prices)

Raise Prices for Bs?

Lower Prices for As?

Customer Selection Do we want more As or Bs?

a n o new cus omers o see

What to do with the current customers?

Vending versus Value Selling

8/3/2019 Allied 2

12/14

AOP 12

. .

a. og ca y, e eavy users s ou paymore than light users.

.decide which services to use, basedon a cost-benefit trade-off.

c. Right now, B is getting a free ride

and A is being overcharged.

8/3/2019 Allied 2

13/14

AOP 13

2. No for menu pricing.a. Lowering prices to the As will not make them happy.. y rop a pr ce w en s appy now at t e g er pr ce

c. Raising prices to the Bs will encourage them to change

suppliers. This will drive our unit costs even higher.d.What is the justification for a price increase? Blaming it on a

new accounting system wont impress most customers.

8/3/2019 Allied 2

14/14

AOP 14

3. Ma be for menu ricin .

a. The real issue is value to the customer.os s no rec y re evan or euser; value is.

b. What do we know about customererce tions of value here? Not much!

c. SBP is a variation on old-fashioned cost.

represent good value to customers.