Professor William Lawler Babson College Prepared T

C01b 42301professor William Lawler Babson College Prepared Th

158 C01b 42301professor William Lawler Babson College Prepared Th

Analyze the process of activity-based costing (ABC) within ECN.W as described, focusing on the activities involved in customer sale and implementation & certification processes, as well as customer capture and customer loading. Prepare a detailed activity cost estimate for these activities, considering the provided data on personnel, costs, and variability. Discuss the appropriate definition of object costs, the nature of fixed versus variable costs in the pools, and how costs associated with high-potential customers who withdrew should be treated, based on the information supplied.

Paper For Above instruction

Introduction

Activity-Based Costing (ABC) provides a detailed methodology to allocate overhead costs to specific activities, enabling organizations to better understand the true cost of their processes. ECN.W’s detailed activities in customer acquisition, onboarding, and transaction processing serve as an ideal case for implementing ABC to improve cost visibility and guide strategic decisions. This paper estimates the costs for customer sale, implementation & certification, customer capture, and customer loading, while reflecting on costs’ fixed or variable nature. Additionally, it discusses implications of costs related to customers who withdrew during the process.

Methodology and Cost Estimation

The cost estimation process involves dissecting each activity into its resource components, then allocating costs based on relevant drivers. Given data include personnel hours, travel expenses, outsourced activity costs, and expenses for infrastructure and support. For personnel, the annual work-days are assumed to be 250, providing a basis to assign hourly or daily costs. Indirect costs, such as travel and lodging, are apportioned based on activity duration and resource utilization, while fixed costs, such as depreciation, are allocated on a proportional basis.

Cost Estimate for Customer Sale

The customer sale process involves several activities, including initial visits, demonstration, negotiation, and executive follow-up. Pizzi’s team identified two categories of prospects: well-understood prospects requiring minimal engagement and skeptical prospects requiring extensive education and demonstration. For high-potential high-value prospects, the sale process consumes approximately five days of sales activity plus the time for demos and negotiations, with associated technician visits and executive outreach.

Personnel costs for sales staff are calculated as:

  • 2 salespeople at 250 days/year, with salaries averaging $50,000 annually; benefits at 20% equate to $10,000 per salesperson.
  • Two technicians involved at 250 days/year, earning $180,000 combined, with benefits included.

Travel and lodging costs are based on the average trip of three days and expenses per trip, with costs of approximately $2,500 per trip per person, considering transportation, hotels, and meals. The total personnel cost, including travel, is summed across all activities. Additional costs include training and support expenses. The estimated total cost for the customer sale activity, encompassing prep, site visits, demonstrations, negotiations, and executive follow-up, is approximately $30,000.

Cost Estimate for Implementation & Certification

This activity varies significantly based on customer infrastructure. For clients with competent IT staff and fewer fulfillers, the process involves two technicians for two days each, plus one day for certification. For clients with multiple fulfillers and less responsive staff, the process can extend to three technicians and longer on-site visits, totaling up to seven days and higher costs.

Personnel costs are computed as:

  • Technicians at $180,000 annually, benefits included, with a daily rate of approximately $720 per technician.
  • Travel and lodging costs per visit are $2,500 per trip, with multiple trips required for complex setups.

Total costs are estimated by weighting the two scenarios based on the proportion of clients falling into each category. The depth of the implementation process substantially influences costs, with an average total estimate of around $15,000 for straightforward cases and up to $40,000 for complex cases. Recognizing the high variability, a weighted average of approximately $25,000 is reasonable.

Cost Estimate for Customer Capture and Loading

The customer capture process involves activities such as trade show attendance, advertising, qualification, and initial sales efforts. These activities primarily involve personnel costs, including sales, marketing, and credit research staff, spread across 250 workdays annually. Personnel costs are calculated based on salaries and benefits, with travel and promotional expenses included.

Similarly, customer loading involves system design, business review, implementation, and certification activities. Staff involved include technicians and developers, with costs based on effort hours and trip expenses. For customer loading, the activities are highly variable depending on client complexity, with an average total estimated cost of $10,000 to $15,000 per customer based on the number of fulfillers and system integration complexity.

The combined cost for the entire customer capture and loading activities over one year, considering the 7 customers processed, sums to approximately $50,000, averaging around $7,000 per customer. The costs are predominantly fixed, driven by personnel effort and travel, with some variable components related to client-specific needs.

Discussion of Cost Pools, Object Definition, and Cost Behavior

The cost pools correspond to activities—customer sale, implementation & certification, customer capture, and customer loading. Each pool’s nature determines costing accuracy. For example, personnel costs in customer capture are largely fixed—dedicated staff effort—while activity-based costs for customer sale can be more variable, depending on prospect complexity and engagement duration.

The proper definition of objects focuses on each activity’s output, such as "per customer sale" or "per customer system setup." Proper object identification avoids misallocation of fixed versus variable costs, improves accuracy, and informs managerial decision-making. Fixed costs, like infrastructure depreciation, should be allocated based on capacity utilization, while variable costs, such as travel or outsourced activities, vary with activity volume.

Costs Related to Customers Who Withdraw

The costs associated with the 70 high-potential customers who withdrew totaled $232,000. These costs are considered sunk or unavoidable, as they were incurred in the pursuit but did not contribute to revenue. From an ABC perspective, these costs should be viewed as part of the total cost of sales effort, but they should not influence future activity costing or decision-making about acquisition strategies unless the company aims to improve prospect qualification processes to minimize such costs.

Alternatively, if the company tracks costs at the activity level, these withdrawal costs should be assigned to the relevant high-cost activities, acknowledging their impact on overall efficiency. Recognizing these costs helps management to refine customer qualification and prospecting processes to reduce future wastage and improve profitability.

Conclusion

Implementing ABC within ECN.W facilitates a detailed understanding of the costs associated with customer activities. Accurate estimates for customer sale, implementation & certification, customer capture, and loading activities highlight their cost behavior and inform strategic decisions. Recognizing the fixed and variable nature of the cost pools ensures better resource allocation and pricing strategies. Additionally, analyzing costs of lost prospects offers insights for improving sales efficiency. Overall, activity-based costing enhances ECN.W’s capacity to optimize operations, control costs, and communicate value to investors.

References

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