Activity-Based Costing (ABC) In the Service Industry

Activity-BasedCosting (ABC) In the Service Industry

Activity-BasedCosting (ABC) In the Service Industry

Thediscovery of the internet increased efficiency in many aspects ofhuman life, including the way people do business. This technologicalbreakthrough facilitated the establishment of e-commerce companies,including the retail firms that created a new mode of sellingproducts without the need of physical stores. A time-drivenactivity-based costing system (TDABC) can help e-commerce companiesenhance their performance as well as their competitive advantage. TheTDABC system is an improvement of the traditional ABC system thatallows companies to determine the cost per activity in a moreaccurate way (Stout &amp Propri, 2011). This paper will provide adiscussion of how eBay Incorporation can adopt TDABC and the impactof the system on the company’s competitive advantage as well asperformance.

Overviewof eBay Incorporation

EBayIncorporation is a retail company that sells consumer products via aninternet platform. It is a multinational corporation that wasestablished in 1995, but its first name was AuctionWeb (Lehrer,2013). Its founder, Pierre Omidyar, who was a computer programmer,started the web as a hobby before upgrading to a commercial platformin 1997. The process of upgrading the website was followed by anincrease in the value of items sold via eBay from $ 50 to $ 250 permonth (Lehrer, 2013). Omidyar started charging users of the websitein order to recruit employees who could manage a large number ofchecks. EBay grew by charging the users of its website and taking asmall percentage of all sales. In addition, the number of productssold via the website increased to include consumer electronics,appliances, cars, and home furniture.

Abusiness plan that facilitated the rapid growth of eBay was writtenin 1996 by its first president, Jeff Skoll. The company name waschanged from AuctionWeb to eBay in 1997. The employment of MegWhitman as the president and the CEO in 1998 was followed by therecruitment of a competent team of managers who helped the companyexperience an exponential growth by adopting effective businessstrategies (Lehrer, 2013). EBay went public in the year 1998, whichmade its founder, Omidyar, one of the popular American billionairesovernight. Since then the company has grown by acquiring other onlinefirms (such as PayPal, Inc and that supplement itsoperations.

Implementationof the TDABC cost system in eBay

Theprocess of implementing the TDABC in eBay should follow six majorsteps. First, the company should identify different groups. Theseresource groups may include the departments that carry out differentfunctions to facilitate the delivery of services. The second stepshould involve the estimation of the total cost for each of theresource groups identified in the first step (Santana, Afonso &ampRocha, 2014). In the third step, eBay should determine the practicalcapacity of every resource group. Examples of practical capacitiesinclude the number of working hours that are available, excluding thetraining hours, meeting, and vacation. In the fourth step, themanagement of eBay should compute the unit cost of every resourcegroup, which is accomplished by dividing the total cost of a givenresource group by its practical capacity. The sixth step shouldinvolve the determination of the estimated time for every event,which should be based on the time equation for the activity as wellas the specific characteristics of that event (Santana, Afonso &ampRocha, 2014). Lastly, eBay should multiply the time estimate for eachevent by the unit cost of every resource group.

TheeBay is benefit in three ways following a successful implementationof the TDABC system. First, the TDABC system provides a more accuratemethod of determining cost per unit, since subjective time logs andemployee surveys are eliminated (Stout &amp Propri, 2011). The TDABCsystem facilitates a more accurate representation of under or overcapacity in each resource group. The increase in the level ofaccuracy is attributed to the fact that the TDABC system will alloweBay to express capacity in units of time. Third, the company willnot need to assign excess capacity costs, which implies that the ABCmodel results will not be distorted. This will allow the company toanalyze the specific effects of unused capacity. In overall, thebenefits associated with TDABC will enhance performance by helpingthe management determine the accurate cost of each activity, thusgiving the company an opportunity to eliminate activities as well asprocesses that are not effective or do not add value to its services.

Impactof the ABC system on competitive advantage and business performance

TheABC system will enhance the competitiveness as well as performance ofthe eBay in three ways. First, the system will enhance the capacityof the management to monitor and manage the quality of its services.This will be accomplished by integrating the TDABC system into thetotal quality management system. This integration will allow themanagement to measure the cost of every activity that is involved inthe process of delivering or improving the quality of its services.This information will enable the management to develop valueperformance indicators (Jayakumar &amp Valarmathi, 2016). The needto integrate the ABC system into company’s TQM is based on thenotion that the cost of different services is caused by activitiesand the management can never understand the reason why those costsare generated until it comprehends the activities that are involvedin the delivery of those services.

Secondly,the ABC system provides the management and engineers with theinformation regarding the customer-specific nuances and activities inthe entire business process (Jayakumar &amp Valarmathi, 2016). Thisinformation will facilitate the process of designing services thatmeet the specific needs of the customers, but at the minimum cost.The ability to address the specific needs of the customers is one ofthe key indicators of the company’s level of competitive advantage,but this should be accomplished at the least cost in order to retainthe profitability. The ABC system help the value engineers developservices that are in line with the needs of the target customers, atthe least cost and the highest level of quality.

Third,the ABC system can provide the company with information that isrequired to facilitate a continuous improvement. The ABC systemfacilitates continuous improvement by providing information that canbe used to assess individual processes and activities (Jayakumar &ampValarmathi, 2016). This will help the organization enhance efficiencyand the overall performance by eliminating costly, poor quality, andineffective activities as well as processes. Competitive advantageand performance improvement will be attained after eliminatingactivities and process that have limited the company’s ability todeliver services at the least possible cost, the highest level ofquality, and adding value to all services in a continuously. Inoverall, the ABC system will help eBay increase performance andcompetitive advantage by helping the management apply a combinationof activities that add the highest value, least cost, and help itdeliver services that meet the specific needs of the targetcustomers.

Potentialimpact of the time-driven ABC system on services that are providedonline and those that are offered through traditional channels

Themain difference in the roles of TDABC for online services and thosethat are delivered through traditional methods is the type of coststhat the management can analyze in both cases. For example, the TDABCsystem will help the management of the company offering onlineservices access more data about indirect costs than direct costs(Aziz, Rahman &amp Ghafeer, 2014). For example, the highest and themost common type of costs for services offered online may includeresearch and development, operation, and web design, system upgradingexpenses, and a few direct costs. Therefore, the TDABC system shouldbe adopted and implemented in a way that helps the management capturethe key activities that are associated with indirect costs. Thedelivery of services through traditional channels is likely toincrease direct costs (such as labor expenses) than indirect costs.This implies that the TDABC system should be implemented in a waythat will help the management consider all activities that enhanceits understanding of the key direct costs.

Themain differences in the proportion of direct and indirect costs canbe attributed to the fact that the delivery of services throughconventional channels relay on stores that have physical locations.Most of the costs incurred when running these stores are direct,while delivery of services online avoids all these direct costs(Aziz, Rahman &amp Ghafeer, 2014). In addition, the management ofthe online company can apply a lower per unit cost for services andprovide an accurate as well as more competitive costing. Mostimportantly, the costing system will allow eBay to determine the costof providing different services through traditional methods and theonline channels. This will enable the management to determineservices that can be delivered at a lower cost online and those canbe offered effectively through traditional channels. Moreover, theTDABC will help the management comprehend the overhead costs, sincethe system will provide the details of all activities that areinvolved in the provision of services through traditional and onlineplatforms. In essence, the TDABC will enable the management of eBaymake decisions that minimize the cost of delivering services byseparating those that should be offered online from those that areprovided offline.


TheeBay Incorporation is an e-commerce firm that has grown by expandingthe range of products sold on its website and acquiring otherbusinesses. However, the company can enhance its competitiveadvantage as well as the overall performance by adopting the TDABCcosting system. This will be achieved because the TDABC costingsystem will help the management identify the cost of each of theactivities that facilitates the online delivery of services. Thiswill enable the company to eliminate activities that do not add valueto its services. Therefore, the system will help eBay to deliverservices at the least possible cost, in a more effective way, and thehighest level of quality, thus enhancing performance and competitiveadvantage.


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