![]() The highest perks and services are offered to the top two tiers and even attempt to bring tier-three customers to the top two tiers (Raaij, Vernooij, and Triest, 2003 Raaij, 2005). Based on the determined profitability per customer, the customers can be categorized into tiers ranging from unprofitable or undesired to most profitable.ĬPA is extensively used by banks to sell credit cards. Cost allocation is done while considering the marginal cost which may not incur if the customer is not served. The costs encompass not only production and distribution costs but also sales, marketing, customer services and any other costs. It helps businesses to calculate the net profit generated from each customer (Sales-costs). On the other hand, CPA denotes working out the actual cost a business incurs to serve an individual customer. ![]() Therefore, stock-keeping units can be optimized and also better pricing and promotions strategies can be designed (Themido et al., 2000 Bookbinder and Zarour, 2001). Thus, making the scope for the introduction of new products. Retailers and distributors tend to stock up products with high DPP and discard the ones with lower DPP. The method is useful for gauging the lucrativeness of the product under consideration with respect to profit. Here marketers can assess the gross profit by considering factors like manufacturing costs, warranties, financial overheads, storage, and handling, minus the total sales. ![]() It is more relevant for retail products as it serves a profitability parameter. It involves taking all the costs involved with a product from production to point of sales. Direct Product Profitability (DPP) and,ĭPP method is a volume-based method wherein direct and indirect costs were allocated as per volume (Fernie, Freathy and Tan, 2001).Conventionally, there were two accounting methods widely adopted: The underpinning postulation of logistics costing is to recognize the various costs involved by selling a set of assorted market offerings to the customers. The ABC system can thus present the costing per product even when the business produces multiple products which were not possible with the conventional approach. In contrast, the ABC system would allocate output and costs into the activities that took place while producing these items. In this case, manufacturer B would never be able to know which of the three items it produces consumes maximum costs and generates the least revenue. Traditional costing systems would simply calculate the costing of both businesses by aggregating total output and dividing it by total manufacturing costs. While manufacturer A deals in a single product i.e., men’s watches, manufacturer B deals in men, women, and kids watches. Two watch manufacturers (A and B), both produce 10,000 units every year. The following figure highlights the average costs for the essential elements of logistics costs as a percentage of sales.įigure 1: cost estimation in logistics (Manunen, 2000) An example to illustrate the ABC model Thus, the need for a new cost accounting tool was realized. The result was that the share of direct costs in total logistics costs were reduced and the indirect costs captured the major part. Over time, the businesses started producing multiple products and the distribution channels also proliferated. Shortcomings of traditional methods of estimating logistics costĬooper and Kaplan argued that traditional supply chains were uncomplicated because businesses produced lesser products and transferred these to the consumers through simple marketing channels. This is because logistics functions take place in a dynamic environment. Conventionally, logistics costs were determined as a gross figure, but later on, it was realized that such measures usually present a fallacious account of the logistics costs. The term was coined in the late 1980s by Robert Cooper and Robert Kaplan in their article titled, “Measure Costs Right: Make the Right Decisions.” ABC model is defined as a management accounting technique which allocates costs to different activities that consume organizational resources thereby identifying the costs per product or service or customer (Themido et al., 2000). The Activity-based Costing (ABC) model is one of the many approaches to estimate logistics costs.
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