Although many early examples of ABC originated in manufacturing, managers also use ABC in service and merchandising companies. For instance, the Plastim example includes the application of ABC to a service activity—design—and to a merchandising activity—distribution. Companies such as Braintree Hospital, BCTel, Charles Schwab, and Union Pacific (Railroad) have implemented some form of ABC system to identify profitable product mixes, improve efficiency, and satisfy customers. Similarly, many retail and wholesale companies—for example, Supervalu, a retailer and distributor of grocery store products, and Owens and Minor, a medical supplies distributor—have used ABC systems. As we describe in Chapter 15, a large number of financial services companies (as well as other companies) employ variations of ABC systems to analyze and improve the profitability of their customer interactions.
The widespread use of ABC systems in service and merchandising companies reinforces the idea that ABC systems are used by managers for strategic decisions rather than for inventory valuation. (Inventory valuation is fairly straightforward in merchandising companies and not needed in service companies.) Service companies, in particular, find great value from ABC because a vast majority of their cost structure is composed of indirect costs. After all, there are few direct costs when a bank makes a loan or when a representative answers a phone call at a call center. As we have seen, a major benefit of ABC is its ability to assign indirect costs to cost objects by identifying activities and cost drivers. As a result, ABC systems provide greater insight into the management of these indirect costs than do traditional costing systems. The general approach to ABC in service and merchandising companies is similar to the ABC approach in manufacturing organizations.
USAA Federal Savings Bank followed the approach described in this chapter when it implemented ABC in its banking operations. Managers calculated the cost rates of various activities, such as performing ATM transactions, opening and closing accounts, administering mortgages, and processing Visa transactions, by dividing the cost of these activities by the time available to do them. Managers used these time-based rates to cost individual products, such as checking accounts, mortgages, and Visa cards, and to calculate the costs of supporting different types of customers. Information from this time-driven ABC system helped USAA Federal Savings Bank to improve its processes and identify profitable products and customer segments. Concepts in Action: Mayo Clinic Uses Time-Driven Activity-Based Costing to Reduce Costs and Improve Care describes how the Mayo Clinic has similarly benefited from ABC analysis.
Activity-based costing raises some interesting issues when it is applied to a public service institution such as the U.S. Postal Service. The costs of delivering mail to remote locations are far greater than the costs of delivering mail within urban areas. However, for fairness and community-building reasons, the Postal Service does not charge higher prices to customers in remote areas. In this case, activity-based costing is valuable for understanding, managing, and reducing costs but not for pricing decisions.