Page 65 - DMGT308_CUSTOMER_RELATIONSHIP_MANAGEMENT

Customer Relationship Management

Notes Traditional cost accounting assumes that products and services cause costs to occur. Therefore,
direct labour, direct material and other direct costs are traced directly to products. All other costs
are considered indirect costs and allocated to products on arbitrary bases, such as product volume
or direct labour hours. This costing system can work well as long as indirect costs and product
diversity are minimal. As the product mix costs to occur rather than on merely allocating what
has been spent. ABC traces costs to activities in the production process using resource drivers
and activity drivers based on cause and effect.
There are five primary steps in the ABC costing process:
1. identify activities;
2. identify resource measures (inputs) from the consumption of resources by the activities;

3. identify activity measures (outputs) by which the costs of a process vary most directly;
4. calculate the driver rate; and
5. trace activity costs to cost objects such as products, processes and customers based on the
usage of activities.
ABC has developed into a broad-based tool that provides information on many aspects of
company functions in addition to product cost data. ABC can show how products, brands,
customers, customer groups, facilities, regions or distribution channels both generate revenue
and use company resources. Even though not a complete solution to all business problems, a
good ABC system provides useful information that in conjunction with other management
information, can facilitate improved business decision making.

ABC offers a new way to analyse the allocation of costs to non-production activities such as
marketing, selling, distribution and administration. Customer profitability is more easily
determined through the use of ABC, since the costs can be driven directly to individual customers,
some of whom place more demands on the company than others. Some may require special
orders, purchase just-in-time inventory, or have special delivery requirements, each of these has
a cost that can be allocated to the specific customer using activity-based drivers. Understanding
the needs and costs of each client, and how each impacts corporate profitability, can help to
determine the level of customer service that will benefit both the customer and the company.
The special needs of both large and small customers can be accommodated through a better
understanding of the drivers of both the revenues and the costs associated with each customer.

Customer Profitability Analysis

Typically traditional cost accounting is not able to identify product and service costs or
distribution and delivery costs for individual customers. ABC can help identify customer activities
and track those costs that are allocated to specific customers. This can provide management with
unique information about customers and customer segments. The benefits include:
1. protecting existing highly profitable customers;
2. repricing expensive services, based on cost to serve;
3. discounting to gain business with low cost to serve customers;

4. negotiating win-win relationships that lower service costs to co-operative customers;
5. conceding permanent loss customers to competitors; and
6. attempting to capture high-profit customers from competitors.
Customer profitability analysis has become an important new management accounting tool
based on the recognition that each customer is different and that each dollar/pound of revenue

60 LOVELY PROFESSIONAL UNIVERSITY