Paisley Insurance Company: Activity-Based Costing in a Service Industry
...to the accounts resulting in revised costs of R2.282 per Residential account and R14.57 per Commercial account. In comparison to the traditional costing system of R3.69 per Residential account and R6.15 per Commercial account. This shows the previous over costing in Residential accounts by a decrease of 38%, and showing the previous under costing in Commercial accounts by an increase in of 137%. (Appendix 2) Losses could be yielded resulting from the commercial accounts product being incorrectly under priced. Market share from decreased demand will result from an incorrectly over priced residential accounts costs. At present Commercial accounts make up for only 14% of the total customer accounts although it accounts for 52% of the total indirect costs. (Appendix 3) Using the Traditional Cost allocation would have resulted in Paisley choosing to outsource residential accounts costing R3.69 (traditional costing) to the service bureau’s proposed cost of R3.50, an assumed saving of R0.19 per account. (Appendix4). This would have lead to Paisley making an in incorrect choice of outsourcing the residential accounts services which according to ABC system is cheaper if processed in-house (R2.28 per account). Based on the results of the ABC system it would make sense to outsource the Billing Departments functions over Commercial accounts at a rate of R3.50 per account. This will generate savings of R11.07 per account instead of processing internally at R14.57 per account. Non-Volume based, activity based, cost drivers have proven to be a more appropriate allocation of costs. The increase in demand estimated by the new housing development department of 20% in residential and 10% commercial will affect our decision to outsource because Paisley is already operating at full capacity. Paisley is at full capacity at 70000 accounts (60000+10000), thus it is suggested that all capacity should be allocated to the Residential accounts which is cheaper to process internally. All Commercial accounts should be outsourced to the service bureau. In terms of managing cost effectively m...