Customer Profitability at Stoke plc

Introduction

Managers at Stoke plc have been using various teams to collect activity-based data since 2000. 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. Theses 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.

ABC data

Team 1 - Order related overheads

(Data based on 3 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 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 stock

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

20

2

20

100

Number of hours of pre-sales support

16

10

30

100

Number of hours of post-sales support

10

15

20

100

Number of delayed payments

10

12

10

100

Number of orders

10

30

30

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

Question 1

Calculate the profit for each customer based on the ABC data and discuss what steps the company should consider to improve the profitability of individual customers.

Question 2

Assume that the company has a completed analysis of all customer-related revenues and costs. Discuss why such data is needed and how it can be used to help a company compete profitably.