Chapter 5 – Activity-Based Costing and Customer Profitability Analysis
5-45 (continued-3)
Activity-based costing provides ADA with more detailed and better
estimates of product costs. For example by using ABC, ADA becomes
aware that the cost of Diomycin is lower ($0.4818 per capsule compared
From the schedule, activity-based costing assigns more overhead to
the lower-volume Addolin because the production of Addolin requires
more setups, inspection, supervision, formulation and management. The
current direct-labor-hours based costing system failed to assign costs of
all activities. As a result, Diomycin and Homycin subsidized Addolin.
The production department at ADA also benefits under ABC. ABC
provides better costing information on the cost of each of the activities
and identifies cost drivers and the activities that consume resources and
raise cost. The additional information enables production mangers to
manage cost by managing activities and cost drivers.
Adopting the ABC method is strategically important for ADA.
Because the ABC method provides ADA with a more accurate product
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Chapter 5 – Activity-Based Costing and Customer Profitability Analysis
5-45 (continued-4)
4. Among major uses of ABC in the Pharmaceutical Industry are:
a. Strategic Use of ABC to Reduce Costs
One of the important ways companies develop competitive advantages
is to become a low-cost producer. Many companies in the
b. Use of ABC to Eliminate Low-Value-Added Costs
ABC can be used to identify and eliminate activities that add costs but
not value to the products in the pharmaceutical industry. A company
can eliminate low-value added activities and costs without reducing
c. Use of ABC in Marketing and Distribution
In the pharmaceutical industry, ABC can be applied to marketing or
administrative activities. The cost of performing marketing services
such as distributing products through different distribution channels can
be computed and the information used in making informed decisions.
For example, some of the different channels of distribution in the
who make decisions about which channel to use.
d. Use of ABC to Make Better Pricing Decisions
ABC enables managers to make better pricing decisions by providing
managers with more accurate product cost data for pricing decisions.
e. Use of ABC to Make Better Product Mix Decisions
ABC provides a firm with more detailed and better estimation of
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Chapter 5 – Activity-Based Costing and Customer Profitability Analysis
5-46 Time-Driven Activity-Based Costing (TDABC) in a Call Center
(20min)
1. The TDABC rate per minute for MMI is determined as follows:
Total Projected Costs ÷ Practical Capacity
= $9,515,500 ÷ 12,045,000 = $0.79 per minute
The charge to AS should be estimated as follows:
2. The total time for each type of loan is determined as follows:
Total Calls
Answered
Avg. No. of
Minutes/C
all
Total Time (minutes)
Inquiries Autos Trucks
Inquire re: Rates and Terms
Autos 80,000 6 480,000
Trucks 32,000 7 224,000
Inquire re: Loan App Status
Autos 45,000 5 225,000
Trucks 6,750 11 74,250
Inquire re: Payment Status
Autos 39,000 3 117,000
5-43
Chapter 5 – Activity-Based Costing and Customer Profitability Analysis
5-46 (continued)
The revised proposal would show:
Cost for Autos (1,141,000 x $.79) $901,390
Cost for Trucks (473,750 x $.79) $374,263
Total Cost $1,275,653
Note: For further information on TDABC and call centers, see Robert S.
Kaplan and Steven R. Anderson, Time-Driven Activity-Based Costing, Harvard
Business School Press, 2007; and Bilbert Y. Uang and Roger C Wu, “Strategic
Costing & ABC,” Management Accounting, May 1993, pp 33-37.
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Chapter 5 – Activity-Based Costing and Customer Profitability Analysis
5-47 TDABC; Continuation of Problem 5-46 (20 min)
1. The amount of unused capacity is determined as follows.
Total Calls
Answered
Avg. No. of
Minutes/Call Total
Platinum Regional Bank 234,000 6.0 1,404,000
Healthwise Software Inc. 66,788 5.0 333,940
Johnson Manufacturing 122,665 4.0 490,660
Lesco Online Shopping 233,756 6.0 1,402,536
Babcock Insurance Service 55,455 5.5 305,003
Garcia Electric Supply and Service 38,956 3.4 132,450
Gilbert’s Online Garden Supplies 145,902 4.5 656,559
Unused Capacity 2,088,904
Call Center Practical Capacity 12,045,000
Total minutes used with the AS engagement (9,956,096
+ 1,614,750) 11,570,846
Unused capacity with the AS engagement 474,154
The 2,088,904 minutes of unused capacity is relatively large (17.3% of total
capacity) and has important implications for MMI’s operating and marketing
strategy. First, it indicates the importance of getting the AS engagement,
which would reduce unused capacity to 3.9%, a substantial improvement.
5-45
Chapter 5 – Activity-Based Costing and Customer Profitability Analysis
5-47 (continued -1)
2. The additional business with AS would leave very little unused
capacity(less than 0.1%) as shown below:
Total Calls
Answered
Avg. No. of
Minutes/
Call
Total Time (minutes)
Inquiries Autos Trucks Total
Inquire re: Rates and
Terms
Autos 80,000 6 480,000
Trucks 32,000 7 224,000
Inquire re: Loan App Status
Autos 45,000 5 225,000
Trucks 6,750 11 74,250
Inquire re: Payment Status
Autos 39,000 3 117,000
Trucks 12,000 4 48,000
Inquire re: Other Matter
319,200 150,000
00
Total Minutes for the Combined
Engagement 2,083,950
Minutes for other Clients 9,956,096
Total Minutes 12,040,046
Unused Capacity 4,954
Call Center Capacity 12,045,000
The cost of the unused capacity could be determined as follows:
$.79/min × 4,954 minutes = $3,914
One significant concern with such a small level of planned unused
run out of capacity, which could be problematic.
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Chapter 5 – Activity-Based Costing and Customer Profitability Analysis
5-47