Case Study Information

Customer Profitability at Allegro Pty Ltd

Managers at Allegro Pty Ltd have been using various teams to collect activity-based data since 2010. Each team has consisted of one or more management accountants working closely with department managers. The teams typically work for 3-6 months on data collection and developing spreadsheets. To date the teams have mainly focused on product costing. Recently two teams have been set up to collect data to improve the company’s understanding of customer-related costs and profitability. One team has looked at distribution costs and the second at order related costs.

Only 3 customers were included in the analysis. These 3 customers represent 10% of total sales. The company has approximately 250 customers in total. Finally the teams only considered labour related costs and direct costs for the cost pools.

The first objective for each team was to estimate the total annual overhead cost and annual volume for each cost driver. As the company only focused on three customers the data was quickly estimated.  The second objective was to estimate the percentage of each cost driver per customer.

Collecting Data

The management accept that a ‘cost sampling’ or snapshot’ approach is the best way to identify key activities and their costs.  This technique helps the department to develop estimates of how much time is devoted to different activities. Then by using an average hourly rate for all staff managers will be able to estimate the total annual cost of an activity. The decision to use an average hourly rate for all staff will save time.

Managers decided that between 4 to 8 activities should to be identified by each team.  The possibility of identifying 20-30 activities was considered but this was rejected because there was very little time to do the work. For the whole exercise it was felt that the information must not take too long to collect and interpret.

Most of the managers involved with the new teams have little experience of collecting data regarding activities and cost drivers. With some activities several cost drivers were discussed. This confused some managers who felt unclear why a cost driver was rejected or accepted. The management accountants believed these problems would not affect the accuracy of the data.

Activity Based Costing Data

Team 1: Order related overheads

(Data based on 3 sample customers)

 

Activity cost pool

Cost driver

Annual overhead cost for the 3 customers Annual volume for the 3 customers
Changes to orders Number of order amendments $50,000 3,000
Pre-sales support Number of hours of pre-sales support $100,000 3,800
Post-sales support Number of hours of post-sales support $100,000 2,200
Delayed payments Number of delayed payments over 3 months $70,000 1,250
Order processing Number of orders $60,000 20,000
Invoicing Number of invoices $25,000 22,500

 

Team 2: Distribution costs

(Data based on 3 sample customers)

 

Distribution related overhead costs

Cost driver

Annual overhead cost for the 3 customers Annual volume for the 3 customers
Storage expenses Average cartons in inventory $12,000 5,000
Requisition handling Number of requisitions $8,500 10,000
Standard deliveries Number of standard deliveries $5,000 3,000
Special deliveries Number of special deliveries $12,800 500

 

Customer sales and activity analysis

 

Customer

North South East
Annual Sales $175,000 $178,000 $173,000

 

The following table summarises the percentage of each cost driver per customer.

 

Customer North South East Total
  % % % %
Number of order amendments 40 30 30 100
Number of hours of pre-sales support 30 20 50 100
Number of hours of post-sales support 30 30 40 100
Number of delayed payments 20 30 50 100
Number of orders 20 40 40 100
Number of invoices 20 30 50 100
Average cartons in stock 40 30 30 100
Number of requisitions 30 30 40 100
Number of standard deliveries 10 40 50 100
Number of special deliveries 20 60 20 100

Case Study Questions:

Using the Allegro Client Briefing Report.

In preparation for an Activity Based Costing (ABC) project review meeting Harry Wren, the CFO of Allegro, has asked you to prepare a briefing paper on the ABC data collected by two Allegro teams. Specifically the CFO wants you to:

  1. Calculate the profit for each of the three sample customers analysed, based on the collected ABC data
  2. Provide recommendations the company should consider to improve the profitability of each of the three sample customers.
  3. The CFO is considering extending the ABC analysis to all customer-related revenues and costs and wants you to provide reasons, for consideration by the project review team, why such data is needed and how it can be used to help the company compete more profitably