Costing (ABC) and Customer Profitability Analysis (CPA) by FitFittington

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									Costing (ABC) and Customer
Profitability Analysis (CPA)

Prof. dr. ir. Michael Corbey
TiasNimbas Business School
Campus Tilburg University
The road ahead:
• Activity Based Costing (ABC)
• Why more than ABC?
• Customer Profitabilty Analysis (CPA)
• Typical graphs and principal solutions
• Break
• Exercise
• Case: CPA and VBM at Barclays Bank

2   Michael Corbey (CI-VRC)
Activity Based Costing (ABC)
• Special type of absorption costing
              Aggregate activities (activity agenda)
              Report the costs of the activities
              Identify activity centers
              select the drivers
                          unit level (direct costs)
                          batch level
                          product sustaining (facility level, indirect costs)

3   Michael Corbey (CI-VRC)
• Decreased measurement costs
• Increasing costs of errors
• Changes in competition
• Changing overhead structures
• Distorted products costs
• New products
• New marketing strategies
• Changing production processes
4   Michael Corbey (CI-VRC)
• The ABC-paradox

• Time-Driven Activity Based Costing?

5   Michael Corbey (CI-VRC)
Why more than ABC?
• Production costs are mostly well accounted for in
  ABC systems.
• But what about:
              Pre-sale costs
              Distribution costs
              Postsale service costs (“downstream”, e.g., environmental
              or legal costs)

6   Michael Corbey (CI-VRC)
High/Low cost to serve:
• Customized products             • Standard products
• Small quantity                  • Large quantities
• Unpredictable order entry       • Predictable order entry
• Customized delivery             • Standard delivery
• Change delivery requirements    • No changes in delivery
• Large amount of pre and after     requirements
  sales support                   • No special supports (pre or after
• Require to hold inventory         sales)
• Pay slowly                      • Replenish as produced
                                  • Pay on time

7   Michael Corbey (CI-VRC)
Customer Profitability Analysis
• Entire Value Chain
• Multiple transactions
• Multiple products (1 customer)
• Customer specific costs
• Life cycle of products and customers!

• What if customer is not profitable?

8   Michael Corbey (CI-VRC)
Principal Solutions:
• Rise in sales prices (difficult, see mobile phones)
• Substitute products (“pricing and product substitution
  are complementary”). Try to influence customer in
  quotation phase!
• Redesign products
              Design for Assembly
              Design for Reuse or Remanufacturing

9   Michael Corbey (CI-VRC)
Principal Solutions (2)
• Improve productions (e.g., SMED)
• Change Manufacturing Strategy (split between low
  costs “bulk” and innovative small batches
• Invest in FMS
• And, finally, eliminate products.

10   Michael Corbey (CI-VRC)
• Give examples of high cost to serve, low cost to
  serve / high margin and low margin customers (hint:
  use a 2 by 2 matrix)
• What are the most important obstacles when trying
  to get more information about customer profitability
  in your daily practice?

11   Michael Corbey (CI-VRC)

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