I have researched the online shopping portal Amazon which provides consumer goods of various kinds all around the world. The company is based in the Seattle and have its subsidiary branches spread all over the global. It has global operations and is continuously expanding its reach. The company provides a wide array of products which range from electronics to clothing and accessories, which are delivered to the customer in very short time. The company provides good deals and offers to its customers due to which it is preferred in comparison to other online shopping portals. The good thing about Amazon is that its products are always in good quality and the customer services are reliable. Amazon initially started off as a bookstore and slowly expanded into various segments. Its products are listed under various categories and it has a huge warehousing and order fulfillment team which works to ensure that there are satisfied customers everywhere.
An ABC system means a system where the costs of various products and services are divided according to its total cost and the cost pool. Unlike the older traditional system of accounting where absorption or marginal costing is followed, ABC system of costing assigns the manufacturing costs in such a manner that only the products which need the services are allocated the costs. This helps make sure that the activities can only be assigned to the products which require them. For example, sales and marketing costs will only be assigned to products which require the same. Intermediate products will not be assigned the costs of it. The special costs like testing, inspection etc are recognized and assigned to products in such a manner that one particular product can be assigned only the relevant costs incurred for it. As for Amazon, ABC is an essential and relevant system of costing because Amazon incurs various costs for advertising and selling, these can be separately assigned to the products. The products also go through the process of testing, quality check and approval. The costs can be recognized and allocated accordingly. The method of costing includes a cost pool and the cost drivers which determine the per unit cost which is then allocated to different products.
If Amazon implements ABC, it is have an advantage over other companies functioning in the same service sector. The product costs will be accurately calculated and it may be possible that the costs are lower as compared to the ones in other companies. Traditional methods of costing usually allocate the costs based on machine hours or labor hours, due to which the cost does not reflect a correct and accurate value. ABC takes into consideration only those costs which are relevant to the product and which need to be taken into consideration for that product group. Dividing the cost into various cost pools and allocating them through different cost drivers will help Amazon separate the total cost into various relevant segments and then allocating it to the total products.
Services provided through traditional channels include stores and high end malls where the customer visits and picks products for himself. E commerce services means shopping from anywhere and at any time, this facility is preferred by majority nowadays. The freedom to buy from home and have the goods delivered at the doorstep enables the customers to make their own choices and pick whatever they like. E commerce has become a large medium for shopping because it offers a huge variety of products and services to choose from. E commerce has an advantage over the traditional method of buying goods and if they implement ABC, it will have an upper hand among all the companies functioning in the service sector. ABC is always preferred over the traditional methods of costing. ABC and e commerce go hand in hand, both are modern ways of doing business and both make the work of a buyer easier.
The management has to make a decision about the provision of services via ecommerce or traditional commerce. Once this decision is made, the management should make a decision to implement ABC because this will help determine the costs and also allocate them properly. Another advantage of ABC is that it also helps eliminate unnecessary costs and reduce the overall expenses of the company. The management will also get an insight into unnecessary expenses which can be reduced over a period of time and each department could be made liable for the costs incurred by them. The costs will be divided into cost pools and separate departments could be made liable for the same. The cost drivers could be highlighted and assigned to different managers. This will increase efficiency in work and reduce the overall costs of the products and services.
Traditional channels do not incur a lot of costs incurred by an ecommerce company. This means that the methods of costing followed by them will be significantly different from ecommerce companies. For Amazon, implementing a time driven ABC will reduce the inventory and the costs of storing inventory, it will reduce the duration between trade payables and trade receivables and ensure that the products or services are provided during a short time. The total cost of the product may also be reduced in certain cases and this means an increase in the revenue as well as customer base for the company. The information available to the management will make it easier for them to make decisions about various factors in the company and reduce the time duration between making a decision and implementation of the same.
References
Introduction to Activity Based Costing. (n.d.). Retrieved from Accounting Coach: http://www.accountingcoach.com/activity-based-costing/explanation
Kurtus, R. (2011, Nov 14). ecommerce versus Traditional Commerce. Retrieved from School for Champions: http://www.school-for-champions.com/ecommerce/ecommerce_versus_commerce.htm#.VTN3uKaOJ1I
Marx, D. C. (2009). ABC and Traditional Costing Systems. Retrieved from Business Consulting Services: http://financialsupport.weebly.com/activity-based-costing-abc-and-traditional-costing-systems.html
