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Computations and analysis are part of the allocation process. So is an organization's understanding of activities, identification of appropriate activities, a system for tracking, and using the information. Let's try to apply ABC to Netflix and provide the CFO with some advice.

Provide a list of five of the company's most important (indirect cost-causing) activities and briefly discuss each item.

Identify drivers of those activities, bearing in mind that it must be easy to measure and record the values of the drivers. Do you see any potential benefit in implementing ABC for Netflix?

What are some common issues that lead to unsuccessful implementation of ABC in an organization?

Prepare a memo to the CFO that identifies the activities and drivers, with brief explanations why these activities are the most critical, and why the drivers are appropriate and measurable.

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Solution Summary

Your tutorial gives you five activities, five matching cost drivers, and 175 words of discussion about the benefits of ABC and some common issues in implementing ABC.

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Provide a list of five of the company's most important (indirect cost-causing) activities and briefly discuss each item.

ACTIVITIES

1. Number of postal service rentals: this is critical because each rental requires prepaid postage to and from the customer. So, this is a heavy variable (incremental) cost for each rental.
2. Number of online views: this is critical because each view incurs a royalty and so it is a variable (incremental) cost for each view.
3. Number of customer accounts: an account requires maintenance and transactions so the support team has to respond to messages, inquires, record activity (payment, refunds, re-activation, and clean-up of old history).
4. Number of employees: each employees has a salary and ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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