Article review of “Customer profitability analysis: an activity-based costing approach”
How to present
this article in Harvard reference format?
Smith, M. and
Dikolli, S., 1995. Customer profitability analysis: an activity-based costing
approach. Managerial Auditing Journal, 10(7), pp.3-7. https://doi.org/10.1108/02686909510090276
What are the key
research issues the article wants to address?
The key research issues addressed in the article
"Customer profitability analysis: an activity-based costing approach"
are:
1.
The limited attention given in management accounting
literature to the use of activity-based costing (ABC) for customer
profitability analysis (CPA) and exploring its potential usefulness to develop
more accurate CPA.
2.
The justification of CPA based on cost-benefit
considerations, where the costs of compiling CPA information should be
outweighed by the benefits from strategic decisions that potentially increase
income, such as changing delivery terms or terminating unprofitable customers.
3.
Identifying and analyzing various categories of
customer-related expenses that impact customer profitability, including
purchasing patterns, distribution costs, accounting procedures, and inventory
holding, and how ABC can help in accurately tracing these costs to customers.
4.
The challenges and limitations of conventional ABC
systems in capturing customer-related costs, particularly when the ABC system
is primarily designed for product profitability rather than customer
profitability, and the need to select appropriate activity drivers for cost
allocation in CPA.
5.
The strategic implications of CPA findings, especially when
unprofitable customers are identified, emphasizing that unprofitability does
not necessarily mean customers should be eliminated but rather calls for
innovative strategies or negotiations to improve customer profitability without
compromising customer satisfaction.
6.
The role of detailed, systematic ABC analysis, including
two-tiered activity models, to support both customer profitability measurement
and performance improvement initiatives.
7.
The necessity of combining CPA with Total Quality
Management (TQM) and ABC to achieve a comprehensive customer-focused approach,
which helps in making informed strategic decisions regarding the customer base.
These issues collectively highlight the paper’s focus on
improving the accuracy and strategic value of customer profitability analysis
through the application of activity-based costing techniques.
Describe two main
theories employed in this article.
The article "Customer profitability analysis: an
activity-based costing approach" employs two main theoretical frameworks:
1.
Activity-Based Costing (ABC)
Theory ABC is the core theory underpinning the article. It
emphasizes the identification and allocation of costs based on activities that
consume resources, rather than traditional volume-based costing methods. ABC
enables more accurate tracing of customer-related costs by analyzing the
various activities involved in serving customers—such as order processing,
sales support, distribution, and inventory holding—and assigning costs based on
causal cost drivers (e.g., number of calls, delivery distances, invoice line
items). The article discusses how ABC can more precisely capture the
consumption of resources by individual customers, leading to more accurate
customer profitability analysis (CPA). The article also addresses limitations
of conventional ABC systems, highlighting the importance of selecting
appropriate activity drivers tailored for customer profitability rather than
just product profitability, as these drivers may differ significantly depending
on the business environment (e.g., mass manufacturing versus custom-made products).
2.
Customer Profitability Analysis
(CPA) Framework The second theory involves the strategic framework of
CPA, which involves evaluating the profitability of individual customers based
on the revenues generated and the associated costs of serving them. CPA
integrates with ABC by using activity-based cost data to segment customers into
profitable and unprofitable groups, based on various factors like purchasing
patterns, delivery preferences, accounting procedures, and inventory demands.
The article emphasizes that CPA should be considered from a strategic
perspective, where decisions based on CPA findings (such as negotiating service
terms or selectively managing customer relationships) can improve overall
business performance without necessarily dismissing unprofitable customers—for
instance, considering customers who provide qualitative benefits or have future
growth potential. The CPA framework also accounts for customer behavior and its
impact on firm resources, linking financial analysis to broader customer
management strategies.
Together, these theories provide the foundation for
integrating detailed cost tracing with strategic customer management to enhance
decision-making and profitability.
Describe 3 main
claims of the article in terms of Toulmin's model of argument.
Using Toulmin's
model of argument, which includes Claim, Data (Evidence), and Warrant (the
reasoning linking data to claim), here are three main claims from the article
"Customer profitability analysis: an activity-based costing
approach":
1. Claim: Activity-Based Costing (ABC) provides a more
accurate and meaningful method for conducting Customer Profitability Analysis
(CPA) than traditional costing methods.
- Data
(Evidence): The article explains how ABC measures
specific customer-related activities such as time spent on telephone
calls, number and distance of customer visits, delivery frequency, and
order complexity, using precise activity drivers to allocate costs to
customers. It points out that traditional costing often uses arbitrary or
volume-based cost allocations, leading to distortions in customer
profitability measurement.
- Warrant
(Reasoning): Because ABC traces costs to activities
consumed by individual customers rather than averaging costs blindly, it
reflects true resource consumption, enabling management to identify profitable
and unprofitable customers more reliably. This allows improved strategic
decision-making regarding customer management and resource allocation.
2. Claim: Customer Profitability Analysis (CPA) based
on ABC should be used strategically to manage customer relationships rather
than simply to eliminate unprofitable customers.
- Data
(Evidence): The article presents three types of
unprofitable customers who might still be valuable, including new and
growing customers, those providing qualitative benefits, and recognized
market leaders who enhance company capabilities. It also discusses
negotiation strategies to modify customer behavior to increase
profitability without reducing satisfaction.
- Warrant
(Reasoning): Profitability alone does not capture all
reasons for retaining customers. Strategic management leveraging CPA
information can treat unprofitable customers differently—by renegotiating
terms or improving service efficiency—to improve profitability or gain
non-financial advantages. Hence, CPA is not just a cost-cutting tool but
an enabler of customer-focused strategy.
3. Claim: A two-tiered ABC model incorporating both
macro and micro activities enhances CPA by satisfying dual objectives of
profitability measurement and performance improvement.
- Data
(Evidence): The article references Turney and Stratton's
activity-based model that separates activities into macro (for costing customers)
and micro (for identifying areas of improvement), allowing detailed
analysis of customer-related service-cost differences.
- Warrant
(Reasoning): By decomposing activities into levels, the
model improves accuracy in cost assignment and facilitates identification
of specific processes driving costs, thus supporting both measurement and
operational improvement objectives. This overcomes aggregation problems
common in simple ABC models and enhances usefulness of CPA for management.
These claims
interlock to argue that ABC-based CPA, properly designed and strategically
utilized, delivers superior insights into customer profitability and supports
better customer management decisions.
** references: a collection of management accounting notes; a useful generative AI tool./ also consider another generative AI tool.
No comments:
Post a Comment