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Home arrow Accounting arrow Berliner Balanced Scorecard: The Customer Perspective
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1. From product-to customer profit contribution

The customer profit contribution accounting enables a more precise assignment of direct costs as well as indirect costs (distribution, marketing and order processing), which were -up to now- only broken down into percentages by the help of activity based costing, to the cost unit "customer" by means of additional allocation bases. By using this method, it is possible to evaluate the profitability of the customer. The knowledge of the profitability of individual customers offers both starting points for cost cutting measures, and an opportunity to conduct an improved customer and yield management, and so ultimately enhance the profitability of the entire company.

In the following, instead of the product profit contribution, the customer profit contribution is taken as a starting point and ultimately conveyed in a customer cash flow. The investment calculation of the customer value shall also be explored as well as its role in enhancing the company and/or the market value within the scope of the quantification of the balanced scorecard.

1.1. Product- versus customer-based calculation

A company management will not be able to forgo a product-based calculation, as the processes of planning, managing and controlling are initially fixed to the product or service to be performed. For company internal processes, the product costs are most relevant as long as no customer-specific order requests are taken into account, which are directly assigned to the product concerned. The following diagram is intended to provide a rough schematic overview of the process for determining the customer profit contribution amount, in which an initial product-based calculation is performed and through which the characteristics of the customer-based product calculation are revealed.

Product versus customer costing (accruals accounting)

Diagram 1: Product versus customer costing (accruals accounting)

The "indirect customer costs" are broken down differentiated via activity-based costing and thus assigned cost reflectively. In this way, it is possible to substantially increase the significance of the customer profit contribution.

1.2. Activity-based costing

Activity-based costing provides a formula, which usage enables a better planning and managing of costs in indirect company sectors or allocating them to products or services. The transacted functions in the enterprise's cost centers are broken down into process-based activities. The costs, subjective to so-called cost drivers are assigned to these activities and activity cost rates are thus calculated.

Example3: process "material purchase and storage"

Process costs = 7 605 000 €

Process factor = outlay process

Process quantity = 650 000 €

If one places this data into the formula above, the following result is obtained:

Activity-based costing reflects the utilization of corporate resources and thus offers the possibility to allocate costs more cost-reflectively than absorption costing in which indirect costs are only allocated as a function of the amount on an excess value basis by proportional percentage charges. The central problem when calculating activity-based costing data is that the processes hereby observed are generally inter-divisional and thus encompassing several cost centers. Therefore, the traditional cost accounting based on cost centers cannot directly produce this data. Usually, the process related allocation is effected in two stages. The superior aspect encompasses the main processes. In the activity-based costing they are understood as a chain of homogeneous activities that are subject to identical cost factors for process costs. The main processes are in general inter-divisional activities.

The subordinate level is composed of activities performed in a cost centre, which possibly have their own cost drivers. Initially, a job analysis will be performed at the individual cost centers, in which the separate activities are analyzed and their costs are calculated. Through it all costs are distinguished into activity quantity induced (aqi) costs or activity quantity neutral (aqn) costs. Activity quantity induced costs are in regard to the observed cost drivers, variable, activity quantity neutral costs are in regard to the cost driver, fixed costs. The activity quantity neutral costs are assigned via key factors to the activity quantity induced costs. The following allocation ratio is applied to break down these costs:

Then the costs calculated for the individual activities are consolidated with the main process costs. It is generally implied that there exist constant, proportional relationships between the main process cost drivers and the individual activity cost drivers. If the number of transactions forms the cost driver, this signifies that for each main process transaction the same number of transactions for individual activities is required.6 The costs for individual activities determined via activity-based costing can be utilized in the context of the process design to evaluate the structural variations for the (main) process.

The data of the activity-based costing can however also be applied to monitor the efficiency of ongoing processes. The incurred costs are assigned to the number of cost driver units, correspondent to the capacity of the applicable division. Should the actual utilization be lower than the capacity, only a portion of the costs will be assigned to the actual activities of the division. The remaining costs represent costs for capacity, which is available, but unused. As it is usually easier to build up rather than to reduce capacity, a high cost proportion for unused capacity should provide a motive to consider how this unused capacity could be used more productively. In the second approach, the total costs are assigned to the actual number of times the process is carried out (or the actual cost driver value).7 As these costs represent the input factor and the process quantity represents the output factor, the cost rate calculated in that way (or more specifically the reciprocal value thereof) is also considered a measure for the productivity of the activity and may be calculated using the following formula:

Strategic informational advantages of the effects of activity-based costing: Within the activity- based costing the following effects8 are observed:

- allocation effect,

- complexity effect and

- digression effect.

The allocation effect describes the precise attribution of indirect costs of indirect service types according to the utilization of company resources to the product/service units.

The complexity effect characterizes consideration of the complexity of the production process and the multitude of variants of individual products as influence factor within the scope of the calculation.

The digression effect in activity-based costing illustrates that fixed indirect costs per unit sink when the number of units is increased, contrary to the traditional procedure of absorption costing and product costing with activity units.

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