Accura Cost Scalabili Total
cy Benefit ty Points
Keep current system 1 1 1 3
Implement activity-based costing 3 2 3 8
Identify key performance measures of 2 2 2 6
customers
Alternative 1: Keep Current System
The current issues are a result of the failures of the current system allocating customer
cost based on revenue. It is inaccurate because it allocates costs to customers
regardless of their actual support requirements in the period. The cost benefit is low due
to that factor, while it is true that there would be no cost to the company to keep the
system as is, it is inherently flawed, and its benefits would not outweigh the negatives.
Scalability suffers from the same issue as accuracy, using revenue to direct cost
allocation would increase the customer service expense accordingly when customer
revenue increases, leading to more misallocation.
Alternative 2: Implement an Activity-based Costing System
Activity-based costing is an accurate system that properly allocates costs based on
services required. Customer service costs would be directly traceable through the
ledgers, increasing trust in the data. The cost benefit is positive, aside from the initial
installation of the system, there is no notable issues with the system. It would be easily
scalable no matter the size of the business, as it directly uses data through the business
activities, so the number of customers or quantity of outputs would not matter.
Alternative 3: Identify Key Performance Measures for Comparing Customer
Profitability
Identifying key performance measures for customer profitability will increase the
accuracy of data collected. In-depth analysis of the data would be closer to actual
results than with the current system, as there would be many factors that management
can observe and compare between customers. The cost benefit would be like activity-
based costing, as the initial setup is the only real downside of this option. Scalability is
modest, it does not have the ease of adjustment that activity-based costing might have
as the system is analytically driven and require more hands-on work in comparison.
Driving up scale would thereby significantly increase expenses as the company would
need to hire more workers to meet demand.
Recommendation:
Johnson Beverage Inc. should implement an activity-based costing system. The system
would alleviate the pressing issue with the misallocation of customer service cost. The
system accurately tracks costs within the company and would help management with
cost and profit analysis for more than just customer service. It would offer deeper
insights into the inner workings of the company, decrease errors, and increase the
depth of information available to the company. The short-term expense of implementing
the system would mainly consist of company analysis, cost identification, and staff
training. The long-term benefits to the company would greatly exceed the expense of
the switch to activity-based costing.
