Description of the chosen company
There are many companies in the United States of America that offer services to their customers using electronic means such as e-commerce. United Parcel Service of America Incorporation (UPS) is among the companies that are in the service industry and utilize electronic media in carrying out its activities.
UPS offers parcel delivery services and its main office is located in Sandy Springs, USA. It has many other branches worldwide but it is majorly based in USA. The company started in 1907 with James Casey as the major promoter and offered its first services the same year. During that time, its services were only available in California although other branches were later opened due to the increased demand for the company’s services.
Today UPS is a global company that offers parcel transportation services all over the world. Orders for parcels to be delivered are made online by their regular as well as the first time customers. For instance, a customer in Africa who wants their luggage to be delivered from the USA will have to place an order over the internet through the company’s e-commerce website. The company officials will attend to them online and get all the relevant details in relation to the parcel and the customer.
The payment process is carried out online once the customer agrees to the quoted price. Payment can be made through PayPal, credit card or a bank transfer and after payments are made, a confirmatory email is sent to the customer as proof of payment. The officers then order their transportation team to pick the luggage and follow the necessary procedures for dispatch. The customer receives their luggage after a specific duration and in case of any discrepancy, the company offers money back guarantee for the customer. This increases client confidence and loyalty (Friedman, 2006).
Costing methods
Costing entails establishing the costs associated with service or product delivery to customers of in a given business. There are various costing methods in use today and one decides on the appropriate method to use after analysis of the nature of their businesses and the reasons for carrying out the costing exercise. Some of the commonly used costing methods include; activity based costing (ABC), process costing and job costing.
Job costing entails determining the different jobs done in the course of business, estimating their costs and identifying the wasteful jobs (Staubus, 2007). Activity costing is similar to job costing but it further breaks down jobs into activities and the costs associated with these activities are then established. Once the data on the activity costs are collected, the cost accountants identify the activities that waste resources and different ways of reducing the costs related to these activities are then explored after which the best method is adopted. This way the company is able to cut down on costs and in the process boosting its profits (Drucker, 2009).
Process costing is common in the manufacturing industry where the cost accountants identify the various processes that a product goes through before being ready for sell. The cost parameters of each of the processes are then established and used to determine the respective process costs. Appropriate adjustments to cut down on the processing costs are then established and utilized.
Implementing time based ABC on United Parcel service of America Inc.
Time is one of the parameters that can be used to establish the cost associated with a certain service. Time based activity costing entails dividing the particular service into smaller activities and determining the time it takes to perform each activity. The cost of each activity and its returns are then calculated. This way the costly activities that produce low returns are determined and their duration reduced appropriately. United Parcel Service of America can make good use of time based ABC to cut down on its costs and increase its profits.
This can be done by first subdividing the parcel delivery exercise into major activities such as receiving the orders, fetching the parcels, packaging the parcels, recording the details of the parcels and delivering them to the customer. The time taken and the associated costs for each activity will then be established and the returns estimated and recorded (Friedman, 2006).
The cost accountants of the company will then compute the profit associated with each activity. Activities contributing low profits will be thoroughly examined and the reasons for the low profits determined. Time and other parameters contributing to the high costs in the particular activities can be adjusted appropriately to reduce these costs. The profits of the company are likely to shoot up as a result of this process.
Impacts of the ABC method of costing on the business
Activity based costing has great impacts on the market and the business as a whole and a company that adopts it is likely to increase its market share. UPS can use the method to reduce the time and procedures that a customer goes through in the process of being served (Drucker, 2009).
Once this is done more customers are likely to shift from the competitors of UPS to UPS. In the process, the profits of the business will increase since increasing the returns of each activity will have increased. Activity profits contribute to the overall profits of the company as they are directly proportional.
The decision making process will also be improved and made more analytical for the managers of UPS. There will be a clear procedure for making decisions as the managers will need to determine the costs and returns associated with each activity. This knowledge will mean lea time is spent in making decisions. The decisions made will also be profitable as they will be empirical and fact based (Staubus, 2007).
The potential impact of time-driven ABC costing of services
UPS has both online and traditional manual activities. The process of activity costing will affect these activities directly and indirectly. Some of the online activities include; making of orders by the customers, receipt of payments from customers and confirmation of receipt of parcels by clients. Activity based costing will ensure that the time used in effecting these activities is properly utilized thus minimizing the losses.
The analysis is likely to propose a process that will ensure the payment exercise is carried out accurately and within a shorter duration. This will not only utilize the best staff but will also improve the efficiency of the whole exercise. Furthermore, a lot of people will believe in the services offered by UPS thus increasing their demand and customer loyalty.
Traditional services are those services that do not utilize e-commerce technology. An example of such an activity carried out by UPS is the exercise of dispatching the parcels. Time based ABC will evaluate the cost associated with the dispatching exercise which will be used to improve on the returns of the UPS. An example is by increasing the number of employees carrying out the process or using different means of transport. This way the traditional activity will be more profitable and the duration of carrying it out reduced considerably (Weygandt et al, 2012).
Use of ABC by managers
The knowledge of activity based costing and its impacts on a business are useful to managers since they are supposed to make the best decisions to ensure the business prospers. It is clear from the analysis that ABC is a useful tool in the decision making process to a manager. The data obtained from the activity costing process will provide a clear means for setting strategies and putting everything in place to ensure the company’s goals are achieved.
Supervision is also one of the roles played by managers and the act of subdividing the services into activities will enhance this function of management (Staubus, 2007). Activity based costing can also be used by managers in rewarding and fixing employee remuneration (Weygandt et al, 2012). UPS can find out the activity that brings the most returns to the company and this can be used as a means of fixing the salary of employees by making it proportional to revenue returns.
The managers can also use it to determine the reasons as to why given goals are not accomplished and ensure that the clear procedures for the achievement of the goals are followed. In summary, ABC is a method of costing that can be of great use in the business world in many aspects if correctly applied.
References
Drucker, P. (2009). Management Challenges of the 21st Century. New York, NY: Harper Business.
Friedman, T. (2006). The World Is Flat: A Brief History of the Twenty-First Century, New York, NY: Farrar, Straus and Giroux.
Staubus, J. (2007). Activity Costing and Input-Output Accounting. London, UK: Irwin Inc.
Weygandt, J. J., Kimmel, P.D., & Kieso, D. E. (2012). Managerial accounting: Tools for Business Decision Making (6th ed.). Hoboken, NJ: John Wiley and Sons.