Activity Based Costing
Are some customers more profitable than others?
Consider two customers both spending $10,000, buying the same products from you. One customer is always ringing up your sales team, asking questions, demanding reassurance, the other is all ready confident and knowledgeable about the products they are buying. When it comes to paying the first customer is slow and requires constant calling and eventually pays just before legal action is taken. The other customer pays on time, electronically and your accounts team spend no more than 2 minutes on that account. Using traditional accounting methods the products have the same contribution to profit as the costs of running the sales department and the accounts department are evenly spread across all customers. Using activity based costing (ABC) you would know that one customer takes up more of your time than the other and so the profit margins for each are different.