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BA (Hons) Business Studies



I declare that this dissertation has not already been accepted in substance for any
degree and is not concurrently submitted in candidature for any degree. It is the result
of my own independent research except where otherwise stated”.



Foremost I thank the almighty God with all my heart for being my guide and major
support in all decisions of my life. Without him this work there would not been

I want to express my gratitude to my supervisor, Dr Mervyn Sookun for guiding and

advising me in the design of this dissertation.

I would like to thank my girlfriend for her unconditional love, for being that person
who has been with me in all situations of my life.

I highly thank my parents who have provided me their permanent support and love
during my whole life.

I would like to express my profound appreciation to Lynne and Sam for making me
feel at my home. Their unconditional collaboration has been fundamental in the
development of this work.

Finally thanks to CEO and the group of employees for providing me the information
required for this dissertation.

This research aims to understand the way to implement customer profitability analysis
with time driven activity based costing, and explore its potential value in improving
decision related to the allocation and use of resource, time and efforts in a wholesaler
agrochemical company.

Theoretical framework regarding customer profitability analysis, cost-accounting

systems such us: traditional, activity based costing and time driven activity based-
costing has been considered.

The approach for conducting this research was descriptive and exploratory, since this
study provides a description of the existing theories and previous studies in the field
and then explores how to implement the model in the company case. In addition,
primary data was gathered through online interviews and questionnaires with the CEO
and employees.

The principal findings revealed that that this model can be built and implemented
according to the models designed in previous studies. Furthermore, This useful tool
allowed the company case to recognize the origin of its costs, the exact amount to
serve each customer group and its real profitability. In addition, the company case
recognized the gaps and failures of its previous profitability measures.

ABC Activity Based Costing

TDABC Time Driven Activity Based Costing

CEO Chief Executive Officer

SG&A Selling, General and Administrative


Figure 1: The customer profitability cycle……………………………………..…24

Figure 2: Research finding and analysis scheme………………………………35

Figure 3: Gross Profit per customer……………………………………………...38

Figure 4: Segment’s contribution to the total sales……………………………..39

Figure 5: Costs allocated to each customer group……………………………..40

Figure 6: Operating profit per customer under arbitrary approach……………41

Figure 7: Cost to serve under both approaches………………………………...55


Table 1: Gross profit per customer……………………………………………….43

Table 2: Current costs of the company case……………………………………44

Table 3: Estimation of the costs (Administrative Department)………………...45

Table 4: Estimation of the costs (Logistic Department)………………………..46

Table 5: Costs of one minute of both departments……………………………..48

Table 6: Description of administrative activities…………………………………49

Table 7: Description of logistic activities…………………………………………50

Table 8: Number of call, travels, cases and invoices by each customer


Table 9: Cost to serve each customer (Administrative Department)…………53

Table 10: Cost to serve each customer (Logistic Department)………………..54

Table 11: Costs allocated to each customer group…………………………….54

Table 12: Customer profitability under TDABC…………………………………56


1. INTRODUCTION……………………………………………………….....…1
1.1 Research Background………………………………………………….......1
1.2 Case Company………………………………………………………….......3
1.3 Problem Statement……………………………………………………........4
1.4 Problem Definition…………………………………………………….........5
1.5 Research Purpose…………………………………………………….........5
1.6 Thesis Outline…………………………………………………………........7

2. LITERATURE REVIEW……………………………………………….........8
2.1 Customer profitability analysis: theoretical and practical background....8
2.2 Customer profitability in the last decade…………………………...........12
2.3 Customer profitability analysis with Activity Based Costing…...........…16
2.4 Customer profitability analysis with Time-Driven ABC……………........18
2.5 Design of Time-Driven activity based costing…………………..............20
2.5.1 Identify the resource expenses and their total cost…………..........20
2.5.2 Allocate resources expenses to cost pools…………………............20
2.5.3 Estimate the practical capacity of the resources groups….............21
2.5.4 Estimate the unit cost of resource pool………………………….......21
2.5.5 Determine the unit times of activities…………………………………21
2.5.6 Define time equations……………………………………………........21
2.5.7 Obtain cost driver rates………………………………………………..22
2.6 TDABC Customer profitability analysis in application…………….........22
2.7 Design of TDABC Customer profitability analysis………………….......24

3. RESEARCH METHODOLOGY………………………………………......26
3.1 Research Philosophy……………………………………………………...26
3.1.1 Ontological Considerations………………………………………...…26
3.1.2 Epistemology Considerations………………………………………...27
3.2 Research Approach……………………………………………………...28
3.3 Research Strategy……………………………………………………….29
3.4 Research Method ……………………………………………………….30
3.5 Selection of case study………………………………………………….31
3.6 Data Collection…………………………………………………………...31
3.6.1 Primary Data…………………………………………………………...31
3.6.2 Secondary Data……………………………………………………......32
3.7 Quality of the Study……………………………………………………...33
3.7.1 Validity………………………………………………………………......33
3.7.2 Reliability….........………………………………………………………34
3.8 Limitations………………………………………………………………...34


4.1 Company description………………………………………………………35
4.2 Current customer profitability measures in the case company………..37
4.2.1 The gross profit per customer……………………………………….38
4.2.2 Segment’s contribution to total sales……………………………….39
4.2.3 Allocation of selling, general and administrative costs……………40
4.2.4 Operating profit per customer……………………………………….41
4.3 Design of TDABC Customer profitability in the company case………..42
4.3.1 The gross profit per customer……………………………………….42
4.3.2 Allocation of the costs to customers using TDABC……………….43
4.4 New TDABC Customer profitability model………………………………55
4.4.1 Cost to serve under both approaches……………………………...55
4.4.2 Profitability under Time driven activity based costing…………….56

5. CONCLUSIONS…………………………………………………………59

6. RECOMMENDATIONS………………………………………………...61

7. BIBLIOGRAPHY……………………………………………………......63

8. APPENDICES……………………….…………………………….........69

The purpose with this chapter is to give a short presentation of the problem area;
Initially, a background is provided to the reader in order to give some insight into why
the topic was chosen; after that the author will present the company case, this is
followed by a discussion of the problem, which lead the researcher to stating the
problem definition and research objectives.

Finally it ends with an outline of the study, which allows the reader to see what is
included in every chapter.


In today’s highly competitive market, a key element governing the success or failure of
any company has almost always been the ability or skill to have high levels of service
or offer better value propositions than the competitors (Kumar 2008). However,
despite customization, value products and high quality services may bring many
benefits to the company in terms of customer satisfaction, these could also increase
its costs, which in turn affects the margins and profits. Furthermore, Klien and
Einstien (2003) claimed that unless satisfaction guides to loyalty it could not lead to

Therefore, nowadays the company’s success depends heavily on the ability to

recognize those customers who create more profits and value to the company. Firms
need to understand customer differences in terms of what they need from the
company and what they represent to the enterprise in order to prioritize its efforts and
avoid misallocating resources and time; it makes no sense to spend the same time
and resources on all customers (Peppers and Rogers, 2004: 113).

According to Kumar (2008), choosing the right customer is an effective strategy for
enhancing net margins; this strategy intends to maximize profits by reducing the cost
incurred. Companies should invest in those customers who are most likely to be
profitable and dedicate their efforts and time in improving the relationships with them.
Companies in order to identify valuable customers and take better decisions in terms
of time and resources allocation have made use of customer profitability analysis; this
useful tool have provided firms many benefits such us: providing greater services to
profitable customers, managing costs and revenues more accurate (Van raaij, 2005),
setting price based on cost to serve and changing unprofitable customer relationships.

In addition, another important contribution of this tool has been the fact that after
implementing this technique many businesses have found that a relatively small
percentage of customers account for a large proportion of total profits (Wayland and
Cole, 1997:121). Therefore, “companies are recognizing that not every customer is
profitable” (Dyche, 2000:65).

This tool has played a fundamental role on deciding how much resource; time and
effort should the company deployed to a particular customer, this analysis has
become really important since help firms maximize their profitability.

Many authors have claimed that success heavily depends on the skill to direct
resources to the customers who will provide the greatest benefit to the company.

According to Peetty and Goodman (1996) customer profitability could be defined as

“the difference between the revenues earned from customers and all costs that can be
associated to them”. The essence of this tool is the allocation of all costs to a
customer or customer relationship (Van Triest 2005). Thus, Companies in order to
design a reliable model must gather accurate customer cost information.

Through history, activity based costing has been the most popular and suitable
method for evaluating customer-service costs. This cost accounting system has
offered more exact figures of how much it cost to serve every customer.

However, despite the numerous benefits of customer profitability analysis with ABC,
many companies have resisted to build it due to its difficulties to implement and
update (Hart and Smith, 1998).
Therefore, In 2004 Robert Kaplan and Steve Anderson with the purpose of addressing
the failures of activity based costing introduced a new costing technique known as
“Time Driven Activity Based Costing”. This new approach simplified the costing
process and improved the quality of customer profitability analysis. In addition many
companies such us: Hunter company, Klein Steel, Sanac, Kemps LLC and Banta
foods has delivered successful results. Furthermore, Anderson (2007) claimed
“TDABC has offered much better information that has made other company’s tool
strategies more powerful”.

Hudig (2007) recognized that time driven activity based costing can be used in
combination with customer profitability in all kind of organizations. However, Kaplan
claimed (2007) that larger and complex companies could get more benefits from it.

This research will be completed on a case study, where Ecoinsumos is the case
company, in the next section a company overview will be presented.


Because this research is done within Ecoinsumos, the author will offer you with some
understanding of the company.

Ecoinsumos Ltd is a Colombian agrochemical wholesaler company located in Boyacá

(Tunja); its key business scope centres on the distribution of insecticides, herbicides,
fungicides, fertilizers and seeds treatments used by farmers to protect their crops from
disease and insects.

The company was established in 2003 by CEO Carlos Prieto Ortiz. Despite its short
time in the market, Ecoinsumos has become in one of the Boyacá’s largest distributors
of agrochemical products. Today the firm is working with the major manufacturers of
agrochemical in Colombia; suppliers such us: Bayer Crop Science, Syngenta, Arysta,
Ecoinsumos distributes its products from its warehouse located in Tunja to different
cities; the company currently operates in the whole geographic region. What has
made Ecoinsumos unique in the market has been its capacity to serve customers who
are in areas difficult to reach. The company’s sales are made directly to customers.

Its main competitors in the market are Dow, Dowpont and Proficol. Ecoinsumos is
considered as one of the strongest company in the industry due to the company
offered value-added solution to the customers, independently its size or location.

The company’s revenue for 2009 amounted to £1.242.00; its revenue grew 4.5%
compared to 2008


Over the last three years, the number of agrochemical distributors in Boyacá has
significantly increased; it has induced a more competitive market. Therefore,
Ecoinsumos is looking for new ways to compete more effectively and efficiently.

While many of these companies have heavily competed with low prices, the
Ecoinsumos’s main strategy has been to provide better delivery options to the
customers. Nonetheless, it has growth its costs, which in turn has affected its profits.
Furthermore, Ecoinsumos in order to overcome this problem have decided to improve
its distribution network. The CEO designed an optimum delivery route based on the
customer’s geographic location.

Despite this strategic approach has brought many advances to the firm, it has missed
out an important aspect; the CEO does not know the real costs to serve of each route;
these costs have been estimated through and arbitrary approach, it means that
selling, general and administrative costs have been allocated to the customers
according to their sales revenues. Therefore, the development of customer
profitability analysis with time driven activity based-costing system could provide
important benefits to the company in terms of cost reduction, costs allocation and
more value to the profitable customer which in turn could enhance the performance of
the company.

In addition, at this time the firm measures customer gross profit and customer
operating profit. However, as mentioned operating profit may be inaccurate since the
company does not use an adequate approach to allocate the costs to their customers.
Consequently its real customer profitability is unknown.

Therefore, the author believes that the development of TDABC customer profitability
analysis may offer a whole picture of the costumer costs since the theoretical
framework shows the benefits of this tool and previous research papers have released
successful applications in other companies.

Furthermore, an adequate implementation of this tool could provide Ecoinsumos to

maximize the use of its resources, which may lead to higher profits.


Based on the research and problem background; the researcher has designed two
research question in order achieve the purpose of the study:

 How can customer profitability with time driven activity-based costing be

implemented in a wholesaler agrochemical firm?

 How can customer profitability analysis help improve the allocation and
utilization of resource, time and effort in an agrochemical wholesaler company?


Considering all information above, the aim of this research is to show how customer
profitability analysis using time driven activity-Based costing can be implemented in a
wholesaler agrochemical company and explore the potential usefulness of this model
in improving resources, time and efforts allocation and utilization.

In order to achieve the main aim six objectives has been identified:

 To identify how customer profitability analysis has been applied in other


 To investigate how to build an appropriate TDABC customer profitability model.

 To evaluate the current situation of the company case in terms of customer


 To implement customer profitability analysis with time driven activity based

costing in the company case.

 To evaluate how the implementation of this model help improve resources, time
and efforts allocation across customers.

 To provide suggestions to the organization on how it can enhance its resource,

time and efforts allocation process.

The author decided to divide the research into the following chapters:


 Research Background  Customer profitability analysis

 Customer profitability analysis in the last

 Company case decade.

 Activity Based Costing

 Problem Statement
 Time Driven ABC

 Problem Definition  Design Time Driven ABC.

 Time Driven ABC in application.

 Research problem and objectives.
 Design of TDABC Customer profitability


 Research Philosophy  Company description

 Research Approach  Current customer profitability

measures in the case company.
 Research Strategy
 Design of TDABC Customer
 Research Method profitability in the company case

 Data Collection  New TDABC Customer profitability

 Quality of the study

 Limitation


The purpose of this chapter is to describe previous studies in the field of customer
profitability in order get a better understanding of the theories, models and techniques
relevant to the study. Once done that, the author will evaluate the different cost-
accounting systems such us: traditional, activity based costing and time driven activity
based costing, which may facilitate the success of customer profitability analysis
implementation. This is followed by an explanation of how to design a time driven
ABC, this is provided due to from the author point of view this cost system is the most
suitable one to conduct the analysis. Finally, the researcher will include the
experiences of two wholesaler companies that have implemented TDABC customer
profitability analysis.



Concepts regarding costumer profitability analysis and customer accounting have

historically been written in the marketing literature. These papers have dealt with the
need of understanding the profitability of every single customer in order to allocate the
resources accurately.

The earliest attempts to evaluate customer and product profitability appeared in

Louisville Grocery survey (1928). This study showed that “in one company more than
half of the total customers contributed in less than two percent of the sales volume, in
addition, the study released that 40% of items in stock brought less than 2% in the
sales volume”. The survey recognized that the big problem was that the firm stocked
too many brands, varieties and sizes (Mellman; 1962:2). Therefore, The author can
conclude that a big variety in items does not necessarily mean better sales and profits.
This principle could also be applied to customers; thus, the increase in the number of
clients does not automatically lead to be more profitable.
The following years marketing writers such as Longman (1940) noted, “scientific sales
management required from the account profits and loss statements by products and
customers, it also needed data on the direct and indirect costs of the many services
rendered to customers”. Others such us Sevin, C (1947) claimed that “in many
business a large number of customers, orders, commodities and so on, may bring in
only a minor proportion of the sales”; this author found that the principal reason
because companies did not increase their profits when they grew, was due to firms did
not know their real costs. These academic articles are evidence that product and
customer valuations have always been included in the decision making process as a
tool for allocating resources effectively.

In 1952 the report published by General Electric was a demonstration of a

reorientation of managerial emphasis from the factory to the market (Mellman, 1962).
From this point onwards companies increased emphasis on accounting reports and
analysis directed to marketing management.
The American Marketing association found the need for studying and analysing the
values and uses of distribution costs (Sevin, 1957), suggested a closely related
distinction. They concluded “if a company succeeded in increasing its distribution
efficiency, it would be able to make more goods available to more people at lower
prices”. In addition, they also claimed that to be more efficient depend on deep

Again in more contemporary times Michael Schiff and Martin Mellman in their study:
“Financial management of the marketing function” (1962) described deeply the control
of marketing costs across a selected group of companies (twenty eight). Their
principals finding revealed that a large part of the field research was concerned with
design of the net profits reports (Mellman (b) and Schiff, 1962).

Nevertheless, despite the interest shown by many marketing writers and companies to
create knowledge and practical implementations in the field of customer profitability,
the topic really took root until the growth of alternative costing techniques in the late
Therefore, Shapiro, Rangan, Moriarty and Ross (1987) in their academic article
“Managing customers for profits not just sales” pointed out that companies needed to
understand the origin of their costs and exact amount to serve each individual
customer; They recognized that customer profitability could be affected by geographic
location and order size. Furthermore, He also noted that the cost to serve a customer
differs among them.

The same year in a critical analysis of recent literature Dudick (1987) argued that
customer profitability could not be determined by estimating selling, general and
administration costs. The author rejected this approach adopted for several firms,
because he considered that companies needed to develop more precise measures of
their SG&A expenses. The basic idea of SG&A approach was, to allocate selling,
general and administrative costs to each customer or product according to their sales

Similar to Dudick (1987) Bellis-Jones (1989) in his article published in “management

accounting academic journal” advocated Dudick’s point of view, He considered SG&A
cost approach as inadequate. Moreover, this author recognized the benefits of
identifying how every single customer influence the cost of supply; Jones (1987) said
“when a company is able to apply Activity Based Costing method in this way
marketing strategy is enhanced”.

In the following years leading authors such us Cooper and Kaplan (1991) added in
their article “Profits Priorities from Activity Based Costing” that this new powerful tool
allowed companies to understand “how products, brands, customers, facilities, regions
or distribution channels generated revenues and consumed resources. Thus,
managers could identify where to take actions and to allocate resources in order to
drive more profits. Furthermore, their central idea was to measure the expenses of
each product or to serve a customer separately.
However, their most relevant contribution was the application of Pareto principle into
the field of customer profitability. Vilfredo Pareto (1906) “noted that in his home
country of Italy 20% of citizens held most of the total wealth and the other 80% held
just 20%”. Cooper and Kaplan (1989) adapted this rule into the business framework;
therefore, their research indicated that 225 percent of profits came form 20 per cent of
customers and 80% of customers did not generate profits, even 10% of them caused

On the other hand Noone and Griffin (1997) developed a new theoretical and practical
approach within customer profitability and activity based costing literature, their
proposal focused on service industries, specifically in the hotel sector. They concluded
that management accounting techniques had been centred on manufacturing sector
so far, therefore, their contribution consisted in explaining, how customer profitability
information, regarding to customer base provided managers a broad vision, in order to
sustain long-term profitability and growth in hotels. In addition they identified that
Activity Based Costing was the most efficient and correct method to implement in
customer profitability analysis.

Nevertheless, one of the most important findings came until the end of the 90s, when
Storbacka (1997) introduced “The Stobachoff curve”, it showed the distribution of
customer profitability graphically.

To sum up, all these theoretical and practical advances related to customer
profitability have engendered a development within management accounting field.
These approaches have been the basis in the construction of new knowledge.
Furthermore, all authors emphasized the relevance of producing figures and key
measurement of customers in order to recognize how much every individual customer
contributes to the total revenue of the firm.


Throughout history customer profitability analysis has provided companies a guidance

of how to measure and analyse customer value. However, with the growth of global
competition, this subject has gained increased importance in the last 10 years.
Nowadays, understanding customers is more fundamental to success than ever
before. Therefore, knowing them inside out can lead to take better decisions in the
field of managing cost and revenues.

One of the first attempts to study customer profitability in the 21st century appeared in
2001. A study by Kaplan and Narayanan (2001) released how customer profitability
analysis could be applied in practical situations and how this could be used in health
care sector. Furthermore, they claimed that this analysis was especially useful for
services companies.

The same study demonstrated that, if companies realized the drivers of an individual
customer, they would be able to take actions in order to change unprofitable
relationships into profitable ones. Moreover, Guilding and Mcmanus (2002) were
accord with this view; these authors recognized a positive relation between market
orientation and the relationship with customers.

Another authors who addressed this subject were Nirajah, Gupta and Narashiman
(2001), their findings revealed that few number of customers were responsible for a
large proportion of profitability and “a large customer with large volume could be
unprofitable”. In addition, the same research verified that the cost to serve a customer
differs among them. Thus, profitability should not be studied in terms of customer

Considering Nirajah (2001) point of view and customer profitability literature, Van
Triest (2005) in his article “customer size and customer profitability in non-contractual
relationships” placed greater emphasis on how customer profitability margin change
from one customer to another. This author recognized that customer profitability not
only depended on gross margin product; it also depended on the service and support
cost that companies incur in keeping their relationships with their customers (Cost to
serve). Therefore, According to Van Triest customer profitability could be defined as
sales revenue deducting the product cost and the cost within a customer relationship.
The same year in an effort to recapitulate the benefits of customer profitability
analysis, Van Raaij (2005) recognized the value of this analysis within the companies;
From his point of view, if a firm was able to segment its market based on customer
profitability it could offer better service to those customers who deserve it. His
approach added to the literature a general idea of how companies could take
advantage of this tool, make better marketing investments and develop customer
services strategies.

In similar vein, Helgsen (2007) in his article “Customer segment based on customer
account profitability” recognized the importance of applying a market segmentation
based on financial figures. In addition, this author explained how to conduct this. He
identified two ways for segmenting the market: in the first approach “customers are
assigned to the different profitability segments according to customer revenues” and in
the second customers are classified based on product margins and relative cost to
serve. Finally Helgsen proved that this segmentation could be used in any industry;
however this analysis does vary from one framework to another.

It is important to point out that most of customer profitability researches were based
on 80/20 rule or Pareto principle. From these studies point of view, there is clear
evidence that small numbers of customers are responsible for a large proportion of the
turnover. Therefore companies must focus on identifying those customers, who are
really important and dedicate their efforts and resources to them. Furthermore, in
more modern times “blockbuster strategy” has supported in several ways Pareto’s
approach. According to this strategy “companies earn most of their profits from a few
prominent best selling products”, this approach is specially applied to popular
products. However, it could also be valid in terms of customers; it means that firms get
most of their profits from a small number of best selling customers.

Nonetheless, this literature has been contrasted in recent times. Chris Anderson
(2006) in his book “why the future of business is selling less of more” developed a new
theory known as “long tail theory” in it he offered three related arguments to the study
of where companies must focus their efforts.
First, Christ Anderson claimed that online distribution channels have transformed the
ways of doing business. Nowadays, because of companies do not have to display
their stock on the shelves their inventory costs have been reduced. Therefore,
unprofitable products through brick-mortar channels could become profitable ones.

Second, Anderson recognized that the online world has modified the customers’
buying habits; these days, consumers can access products of their own interest at any
time. Thus, companies have to offer more products according to the customer needs,
independently of their profitability.

Finally, these two changes led Anderson to conclude that firms do not have just focus
on those profitable products, instead they must offer as many goods as they can
because these products with small margin put together could contribute to something

In addition, this theory could also be relevant in the customer profitability field;
therefore, according to “Long Tail” firms should dedicate in a like manner their efforts
to their customers because all of them play an important role within profitability.

According to the business week magazine, Anderson’s theory was considered as the
most important idea of the year; However, Anita Elberse (2008) in her academic
article called “Should you invest in the long tail” suggested that despite the fact that
internet have allowed consumers to find the most obscure products in the market, it
would be irresponsible for companies depend only on those products with small
margin. Likewise, firms could not just focus their activities on those customers with
small profitability.

It is pertinent indicate that Anita’s research was based on physical and digital music
and home video industries and her principal aim was to analyse the role played by
Long tail theory in today’s markets.

After reviewing the sale data obtained, she discovered that although internet has
allowed firms to reduce costs and offer more products, the concentration of sales
continue toward top selling products; therefore, she did make some recommendations
to those manufacturers who are in charge of taking decisions related to product
development and those retailers responsible for choosing how broad an assortment to

Her principal suggestions were based on the idea that firms should focus on
strengthening their best selling products. Nevertheless, in the case that they decide to
manufacture and to offer some obscure products, they should not allocate resources
drastically to them. Moreover, her finding applies in the same way in the field of
customer profitability. It means that it is more important for companies to keep and
strength their relationships with profitable customers rather than try to get more or
concentrate their efforts on customers with small margin.

On the other hand Anita Elberse also recognized the advantages of having a product
variety and not only sells those products with big margin. From her point of view a
wide product assortment might help to increase sales and attract more customers,
because one long tail product could be the link to buy one hit product. Simultaneously,
clients could feel more pleased if they satisfy their appetites from the same company.
In addition, this theory also concerns customer profitability since one customer could
be the connection with others.
To summarize, Although Vilfredo Pareto stated his principle long time ago, numerous
theoretical and practical modern researches have been conducted based on 80/20
rule. In addition, some authors of the new era such us Anita Elberse (2006) advocated
Pareto’s approach and disagree with long tail theory. She claimed that although none
disputes that there are more obscure products in the market every day, top selling
products are and will be leading in future times. However, companies must be aware
that some long tail products are necessaries in their portfolio in order to satisfy


Nowadays, understanding right costs of serving every single customer has become
necessary within decisions making process. Therefore, firms in order to develop an
accurate and reliable customer profitability analysis need to identify customer cost
information related to each one of them.
Through history, several methodologies have been developed with the purpose of
understanding costs in the context of customer profitability. Nonetheless, the
technique, which has gained more attention in management accounting literature,
has been Activity-Based Costing. Thus, Kaplan and Cooper (1998) claimed that the
ABC model was the most suitable method for assessing customer-service costs
and enhancing the quality of customer profitability analysis.

“ABC was presented initially in 1986 by business professors Robin Cooper and
Robert Kaplan” (Kugel 2008) in an attempt to explain how traditional costing
techniques could distort product costs. However, Howell and Soucy (1990)
recognized that this technique could also be valid with other cost elements,
especially customers.

Previous to the introduction of ABC costing system, most of the organizations made
use of a conventional accounting technique known as volume- based system; under
this accounting method, indirect costs are strongly influenced by the number of
units produced (Foster and Gupta 1990), Nevertheless, in a following research Siu
Y Chan and Dominica Suk (2003) recognized that it was a problem since a large
part of a firm’s overhead costs are not directly related to its production volume.

In contrast to traditional cost system, Activity Based Costing recognizes that all
products are not alike, Cooper and Kaplan (1991) in order to explain the behavior of
overhead costs and fails of the prior cost system suggested a new framework. From
their point of view the basic idea of ABC model was to identify those necessary
activities that consume resources to produce outputs; then determines their costs,
and finally, allocates those costs according to the level of resources consumed by
each product.

In the same way ABC system has been applied to assign resources and to
measure each customer’s profitability, despite the method has been more popular
on the product profitability field there are many researches, which have adapted it
to the costumer profitability analysis. Most of these studies have concluded that
ABC traces overheads more accurately to customers and offers more exact figures
of how much it cost to serve a specific customer.
Thus, Kaplan and Cooper (1991) claimed that the overhead costs cannot be
assigned based on the number of units sold per customer or said in other words,
indirect costs cannot be allocated as a linear function of volume, since some
customers demand more resources than others. In similar vein, Everaert (2008)
noted that traditional system overlooks important factors such us: the number of
sale order that customer place or large amount of pre and post- sales support;
these aspects could also influence the cost to serve.

Activity based costing has been adopted for many companies around the world.
Nevertheless, this method, which has improved decision support and the accuracy
of customer profitability analysis, has been criticized by recent literature. According
to Bain and Company (the global business consulting firm) ABC went from being
the 11th most heavily used tool in 1995 to 22nd position in 2002. In addition, similar
to this research Kugel (2008) in his article “ABC the next generation” claimed that
60 percent of big companies in the United States tried to apply this technique but
just one in five could sustain it for more than five years.

These two studies are clear evidence of the difficulties for many companies to
implement ABC system. However, many advocates of activity based costing
disagreed with the positions mentioned above. For instance, (Stratton, Desroches,
Hatch 2009) after surveying more than 300 manufacturing and service companies
concluded that ABC carry on providing greater support for product and customer
profitability decisions. Similar to them, Cohen, Venieres and Kalmenaki (2005)
recognized the major benefits from implementing ABC; her principal findings
suggested that those companies that have implemented this system has gained
more accurate customer information cost; In addition, they also revealed that the
principal reason to apply this system is a need to improve customer profitability

To conclude, in today’s business environment, determining accurate product and

service cost information have become more vital than ever. Firms in order to design its
costs systems have considered different approaches such us: traditional system and
ABC system, according to the accounting literature many studies have recognized the
numerous benefits from applying activity based costing system over volume based
costing models, however, some researches have showed that various companies
have found several problems during ABC implementation process.

Therefore, Kaplan and Anderson (2004) developed a better initiative to overcome

limitations and difficulties of traditional model.



In 2004 Robert Kaplan (one of the pioneers of ABC) and Steven Anderson
introduced a new costing model called “Time Driven Activity Based Cost”; they
recognized that the traditional ABC model has not been easy to put into practice.
These two authors identified that the model was expensive to maintain and difficult
to update due to the activities are not always the same and resources and process
spending change; furthermore, Mc Gowan (2009) shared Kaplan and Anderson’s
views. From his perspective, ABC is an expensive method because of
organizations are forced to spend time and resources with their employees, asking
them how their work is assigned on a day by day basis, It lead the author to
conclude that ABC system has to be updated frequently.

Thus, Kaplan and Anderson (2004) in order to face the limitations of the ABC
traditional system and to get a better understanding about the cost within the
organizations developed the new technique. Authors such us Tse and Gong (2009)
6 have considered it as the costing model for the next generation. Moreover, they
also claimed that The TDABC system could offer more accurate cost information
whilst eliminating the need to survey employees.

Contrary to the traditional ABC, “time driven activity based costing” takes time as
the primary cost driver for cost objects (Namazi 2009), because most resources are
determined in terms of time availability. However, companies can also use other
cost drivers. Another common feature of the TDABC that differentiate this model
from the traditional one is the identification of activities; while the first step to
develop an activity based cost system consists of recognizing those essential
activities, in this new model companies has to identify their resources expenses
groups such us: salary and depreciation, their costs and their capacity (Everaert P
2008). Unlike to traditional ABC, TDABC considers unused capacity; that means
that cost driver rates are calculated at practical full capacity not at theoretical full
capacity (Kaplan and Anderson 2004) For instance, if an employee can work 20
hours per week and its practical full capacity is 80% the overhead costs will rate
upon the 16 hours per week (Namazi 2009).

Nevertheless, the most important contribution of this new approach was the
addition of multiple time drivers; through this inclusion, complex activities could be
modelled without adding new activities (Everaert P 2008); Kaplan and Anderson
(2004) recognized that part of the failures of the ABC traditional system had been
its incapacity to capture complex transactions due to ABC utilizes single driver rate
for each activity. For instance, in the traditional model, patient-registering costs at a
hospital only depended upon the number of patient registered; however, it could
provide inaccurate cost information since the cost of this activity could also depend
upon the type of customers (Demeere, Stouthysen and Roodhooft 2009).
Therefore. TDABC accommodate the complexity of real world operations by
including time equations (Kaplan and Anderson 2007).

To summarize, while there are many benefits in using traditional ABC, this model
has failed to provide accurate cost information at companies with complex activities;
thus, the newly improved approach “Time Driven Activity Based Cost” has offered a
better way for capturing the complexity of actual operations, at the same time has
been simpler, cheaper, faster to build and easier to maintain (Cleland, K 2004).

TDABC has been applied in many companies with successful results; therefore this
technique has assisted wholesaler organizations such us: Hunter company, Klein
Steel and Banta foods to deliver significant profits enhancement (Kaplan and
Anderson 2003).


The design of Time Driven Activity Based Costing will be based on the model
developed by Patricia Everaert (2008); In addition, it will also take into account
Kaplan’s and Anderson views due to they are its creators.

Therefore the main steps to develop an accurate and reliable TDABC will be
described below.

2.5.1. Identify the resources expenses and their total cost

As mentioned above the first step to design a “time driving activity based costing”
consists of identifying those resources required to perform the activities and their

2.5.2 Allocate resources expenses to cost pools

In the second step, resources expenses must be allocated to the different

departments of the company, such us: administration, warehouse, marketing, etc.
However, They are only allocated to department if it uses them. In addition,
according to Tse (2009), those resource costs that are not used must be treated as
period cost.

2.5.3 Estimate the practical capacity of the resources groups

To estimate the practical capacity TDABC identifies the quantity of resources

(Kaplan and Anderson 2007), For example. Let’s assume that in the administration
department there are 6 employees, all one of them work 20 days per month and the
company pays 8 hours per day to each one of them. Thus, its theoretical capacity
would be 960 (8*20*6) hours in a month. Nevertheless, these workers spend
around 10% of their time for breaks. Thus, its practical capacity would be 864 hours
in a month. The practical capacity is estimated as a percentage of the theoretical

2.5.4 Estimate the unit cost of resource pool

This unit is calculated by dividing the total cost of each resource group by the
practical capacity (Everaert 2008).
2.5.5 Determine the unit times of activities

After estimating the unit cost of each resource, management team must determine
the time to perform each activity; this model uses time as the most important driver
because of most resources can be calculated by the time they are available to carry
out each activity (Kaplan and Anderson 2004). Nonetheless, there are some
resources such as warehouse space, vehicle capacity that cannot be measured
with time.

2.5.6 Define time equations

Due to all activities and transactions are not the same and all of them require
different amount of time, manager team must define time equations for complex
situations. For instance, the team is looking at the process of drooping an
agrochemical product; this product could be distributed to two different customers
(old customer and new customer); this situation cannot use one activity driver since
the time per drop depends on the kind of customer. Thus, a new customer droop off
needs more time than the old customer droop off.

In this specific case the management time must determine the time spent with each
customer in order to define the equation. Let’s assume a new customer drop off
takes 10 minutes and old customer takes 5 minutes.

Time per drop= 5 X1+ 10 X2

Where X1= 1 if the customer is new; 0 Otherwise

X2= 1 if the customer is old; 0 Otherwise

Thus, time driven activity based costing allows companies to group several
activities in a single one.

2.5.7 Obtain cost driver rates

Finally, the last step consists of calculating the driver rates calculated by multiplying
the time spent in each activity by unit cost per resource.

In this section the author will include some application of the model in the real
context and its benefits. Kaplan and Anderson recognized several implementations
of this model, however for the purpose of this study the researcher will only take the
experiences from wholesaler companies.


Kemps is a manufacturer and distributor company of diary products such as: milk,
ice cream, yogurt, cheese, etc. During the 1990s the firm faced big challenges due
to the pressure from large retailers; Historically, Kemps had concentrated on
providing whatever service its customers asked. However, its CEO Jim Green
recognized that the company could no serve “all things to all people”. Furthermore,
Green realized that the company needed understand right costs of serving each

Kemps had used traditional cost system so far; according to this, overhead costs
were estimated as a percentage of the direct costs. Nevertheless, this method did
not provide accurate information to the company in terms of customer cost.
Therefore, in 2001 the CEO and the vice president of financial service decided to
launch a TDABC study in five plants of the company.

The management team in order to design the model collected information such as:
The total cost of a production line, the time needed to perform each activity and the
time spent with every customer.

The implementation of this system brought many benefits to the company. By the
winter of 2003 the enterprise built a full customer profitability model, this include
costs of all customers and products. The model allowed to the company allocates
and uses its resources in a more effective way.

2.6.2 SANAC
Sanac is the most important distributor of horticultural and agricultural products in
Belgium. In the 1990s the company’s profit margins came under pressure because
of the change in the industry and an increased in the number of competitors. Thus,
Sanack had to modify its profitability strategy.

Its first attempt to improve the strategy focused on estimating its profitability by
sector (agriculture, horticulture and home and garden). However, managers did not
include overhead costs in the analysis. Therefore, it did not provide accurate cost

In order to overcome the failures of this analysis, The CEO Gertjan De Creus hired
a consulting company to design a conventional activity based costing model.
Nevertheless, it did not success, due to the dynamic environment. This model could
not collect the details of its complex and diverse activities.

After finding many difficulties to implement conventional ABC, the company turned
to time driven activity based costing; however the new process faced several

Its first challenge was to design right time equations. Thus, the management team
recognized the principal processes and subdivided them in to different tasks. This
company provides many examples of how to build the time equations. For instance,
the process of receiving incoming goods depends on the number of pallets and the
line item.

Time Driven ABC has offered to Sanac more accurate product, customer, delivery
line item and supplier cost information. This has been useful for profitability
reporting, the company has improved its allocation of resources, time and efforts.


In order to help companies identify the most profitable customers Liz Murby (2008)
introduces a method identified as the customer profitability management cycle, this
useful model for all kind of enterprises.
Figure 1: The customer profitability management cycle

Manage Customer Measure

Segmentation Customer Calculate Revenues
Estimate and Assign
costs (Time Driven ABC)
Manage customer
Profitability Measure
Lifetime Value

Measure Customer

The customer profitability cycle (Murby, L 2007)

1. Manage Customer segmentation: Since all customers are not the same and
the purpose of this study is to measure their profits individually, companies must
segment their customers. Many enterprises in order to implement customer
profitability analysis analyse their customers individually, however, others group

2. Measure customer margins: This step consist of calculate the revenues and
estimate direct and indirect costs, companies can use several cost accounting
systems to enhance the information.

3. Measure customer lifetime value: This measure allow the company

differentiates between those customer who show profitability in one period and
those who have set long relationships with the enterprise.

4. Measure customer impact: This stage consists of identifying those customers

who have strong impact on other customers.

5. Managing customer profitability: According to the results of the analysis

companies can take several decisions and enhance their strategies.

The purpose with this chapter is to provide the reader a general understanding of how
the researcher conducted the study to answer the research question. This chapter will
include topics such us: research philosophy, research approach, research strategy
and research methods; this is followed by an explanation of how the information was
collected (data collection process) and, finally the author will present the reliability,
credibility and validity of research findings.


Research philosophy is related to how the knowledge is constructed. The nature of

the knowledge depends directly on how the researcher perceives the world; it can be
influenced by its beliefs and its ways of thinking. For instance, “the researcher who is
concerned with evidence possibly will have a different view on the way to conduct a
research from the researcher concerned with opinion and attitudes” (Saunders
Smith and wood (1999) claimed that the reason why the research philosophy must be
included in any research study is because it helps to the researcher to decide its
overall strategy.

According to Saunders (2008:106) the research approach is influenced by two major

ways of thinking: Ontology and Epistemology.


According to Klente (2008) “the ontology addresses the first paradigmatic question.
What is the nature of the reality?” From the objectivism point of view there is a single
unitary reality, it means that the reality is constructed independently of the social
actors. On the other hand, the subjectivism approach holds that there are many
realities socially built by individuals from their own contextual interpretation (Klente

Despite the fact that customer profitability analysis has released excellent results in
many companies it does not necessarily mean that it will be successful in all
enterprises, the author in the problem statement recognized that this technique could
provide good results to the company case but there is no plenty certainty of it. Thus,
this study is observed subjectively. However, the theoretical framework is very
important in this research since it allows the author to gain a better understanding of
how this technique has been applied in other companies.


The epistemology offers a philosophical background for deciding what kind of

knowledge is valid and adequate in an area of study (Gray, 2009:18).

According to Marks Saunders (2008) there are three philosophies to see what kind of
information is considered as acceptable by the researcher:
Positivism: This epistemological position assumes that the knowledge is only valid and
adequate when it is observable or there are verifiable facts. In addition, according to
this approach, knowledge cannot be altered by the researcher opinion.

Interpretivism: In contrast to positivism, this approach affirms that each person

interpret the world in different way. Thus, things that hold true for some people could
not hold true for others.

Realism: According to Saunders (2008) the core of this epistemological position is that
what the senses show us as a reality is the truth.

This study adopts a combination of positivism and Interpretivism. Firstly, the research
takes on a positivism position since the researcher does not affect the data collected.
Nevertheless, in the last chapter the author adopts an interpretivism approach
because this research intends to give some suggestions on how the model can
enhance the current situation in terms of resources, time and efforts allocation. These
recommendations are based on its personal interpretation.

In addition, from the author point of view the results of customer profitability can be
interpreted in several ways. It depends on the person’s reasoning who analyze them.


According to the nature of the research question and the type of evidence it intends to
produce, there are three different kinds of approaches for conducting a study:
exploratory, descriptive and explanatory (McGivern, 2006: 53).

Descriptive research aims to accurately explain the characteristics of a subject and to

report the way things are. Explanatory research tries to explain why something
happens or the causes behind it (Dantzker and Hunter, 2006:13). Furthermore, it
attempts to show the factors that are causing the problem. Finally, exploratory
research takes place where there is little or no prior knowledge of a phenomenon
(Gratton and Jones, 2004:6). It investigates the full nature of a phenomenon.
The purpose of the research is initially descriptive, as the author provides a
description of the existing theories and previous studies in order to gain a better
understanding of how customer profitability analysis and the different cost accounting
systems have been applied in prior studies.

However, the author also uses the exploratory approach, since the researcher
explores how TDABC customer profitability analysis can be implemented in the
company case.

In this part of the research is also important to define the way in which the researcher
identifies and tackles the problem. It is directly influenced by its reasoning; According
to Ela Kumar (2008:243) reasoning is the process by which we use available
knowledge to draw conclusion or infer something new. She describes three types of
reasoning methods: deductive, inductive and abductive.

The deductive approach develops theories or hypothesis and then tests out these
through empirical observation (Lancaster 2005:22). Therefore, this research starts
with a prior theoretical knowledge and its aim is to evaluate a theory. In contrast,
inductive research builds theories and hypothesis based on empirical observations.
However, the deductive and inductive approaches are not the only alternatives, the
abductive methodology is a combination of the previous ones (Jiewertz and Eliasson,
2007). From the abductive approach point of view data is collected simultaneously to
theory building. The aim of this approach is to develop understanding of a

Due to this research uses real life observations with theoretical framework as a
foundation, and its principal purpose is to understand how the model can be applied
within the company case, abductive approach is the most appropriate approach.


“Before a builder or architect can develop a plan or order materials they first need to
set the type of building required (Saunders 2007); likewise, business researches
before collecting the data they need establish what kind of evidence is required to
answer the research question”. Therefore, a research strategy offers a framework for
the collection and analysis data (Bryman & Bell, 2007).

The choice of research strategy reflects decisions about research units (for instance,
individuals, companies annual reports), the relevant variables of the research units
(Velde, Jansen & Anderson 2004) the data you need to collect and the way in which
you conduct the research.

Saunders (2007) defined seven different types of research design: experimental

design, case study, survey, action research, grounded theory, ethnography and
archival research.

Due to the intention of this research is to understand the complexity of customer

profitability analysis and its potential usefulness in improving resource, efforts, and
time allocation within a particular company; the case study is the most suitable
strategy. This strategy has been considered as a valuable tool in business since
provides students insights for highly skilled decisions in administration affairs (Scholz
and Tietje, 2002).

Thus, the author could gain a better understanding of the subject whilst providing new
solution and alternatives to the company chosen.


The choice of research method reflects decision about what data is needed to solve
the research problem. The most common classification is quantitative and qualitative

Quantitative methods are suitable when the purpose of the research is to collect and
analyze numerical data (Pride, Hughes and Kaapor 2008:565) econometrics and
mathematical modelling are example of methods utilized in that kind of research; on
the other hand, qualitative method is adequate when the researcher wants to get
deeper understanding of a phenomenon. This data is constructed according to what
people say and think. In addition qualitative approach can be utilized as a complement
to quantitative researches, by offering depth explanations of numerical data (Hoque,

Due to this research needs to collect numerical administrative documents such us:
sales, net margin earned by its customers and to measure the cost to serve each
customer, quantitative approach is initially the most suitable option. However, in order
to get a deeper understanding of the current operation process of the company,
qualitative variable such us how the organization serves its customers, a qualitative
research method is also appropriate.

Therefore this research employs both the quantitative and qualitative research

Scholz and Tietje (2002) claimed that the researcher could feel motivate to investigate
a certain case for two reasons: if there is instrumental interest, the objective of the
study is something other than understanding the particular case. On the other hand if
the researcher takes responsibility and is accountable for the analysis, there is
intrinsic interest. Due to the principal motivation of the author is to provide new
solutions and alternatives to the company its interest is intrinsic.


According to Yin (2003) one of the principal strength of case study is the possibility to
collect data from different sources. Thus, in a case study the researcher is able to
gather information from administrative documents, interviews, observations,
organization websites, academic journals, etc.


Primary data is all information that is collected by the researcher for a particular study.
This information does not exist before the research. This data can be gathered trough
observation, questionnaires, interviews, observations, etc.

Due to the chosen company is located in different country (Colombia) to England the
information was collected through online interviews and online questionnaires.
Furthermore, direct observation could not be used as a method to gather data.

Online Questionnaire: A questionnaire is a standardized set of questions to get data

from a chosen subject (Gratton and Jones, 2004:116). They identified three kind of
questionnaire (postal, face to face and telephone questionnaire), however, Stead
(2001:103) recognized one more (Online questionnaire); this method was used to
collect company overview information (see appendix 1). This questionnaire was sent
to the CEO. In addition, this technique was also used to gather information related to
the customer segments, this part was vital within the research, since the new
customer profitability model was designed according to that data (see appendix 4).

Finally, this method was utilized to find out how the company case allocates costs to
its different departments, this questionnaire was really important since the author
needed to estimate the total cost of each department (see appendix 5).

Online interviews: This method allows the researcher collecting verbal information. It
can be used to gather qualitative and quantitative data. According to the structure,
there are three types of interviews (Robson, 2002:227): structured, semi-structured
and unstructured. In this research, the author initially conducted an online semi-
structured interview to the CEO in order to get a better understanding of the business
environment (see appendix 2). This type of interview was chosen because of this let
the interviewer to express its opinion openly. Therefore, the researcher gathered more

Apart from that interview, the researcher conducted two more; both of them were
semi-structured and divided in two parts. The first part was addressed to the CEO and
the second one to employees. These interviews were the support to build the new
model (TDABC customer profitability) (see appendix 3 and 6).
Furthermore, as mentioned above the data could not be collected through face-to-face
meeting. However it was not a barrier thanks to the technology (web cam) and the
willingness of the CEO and employees.


Secondary data contain both qualitative and quantitative data, they are mostly utilized
in descriptive and explanatory research (Saunders 2007). According to Saunders
(2006) secondary data is the available information gathered by others for different
purpose. For instance: Financial accounts, operational statics, company reports,
organization website, journals, newspapers, books, etc.

In this research, secondary data are firstly collected from academic journals,
newspapers, and books in order to gain a deeper understanding of how customer
profitability analysis and the different cost accounting systems have been applied in
previous studies. Moreover, some information is gathered from the financial statement
with the purpose of understanding how the company measures its costs and profits

Information such us: financial statements, operational statics, reports, organizations

database are considered as secondary data due to this information was collected for
different aims.


The quality of any research depends heavily on its validity and reliability; these two
concepts will be examined in this research in order to show the reader how consistent
and accurate is the data collected.

Validity refers to how accurate and exact are the findings generated in a research. To
guarantee validity, the researcher incorporated the evaluation and comparison of the
collected data from the different sources, for instance interviews and financial
statistics, which allowed having a better precision when presenting the results.
Furthermore, most of the interviews were conducted to the CEO and employees in
order to know different perspective of the same issue.

To increase validity all interviews were conducted to the person who had more
knowledge in the area that the researcher wanted to investigate.

The compilation of the information was conducted at special levels in the studied
company, where as the administrative as operational employees were asked to
respond and estimate some questions directed to collect the most precise and useful
information in the investigation.


Reliability is about uniformity between the collected data and the findings. In order to
guarantee reliability of this research, the information gained through the research was
supported by additional data and checked with the employees.

Moreover, the interviews were held with the respondents taking the same level
positions in the two levels of the company, to guarantee that they had similar
understanding of the problem and practice when dealing with it.


Liz Murby (2008) recognized that the value of each customer could be evaluated,
analyzed and measured from three different perspectives: Customer lifetime value,
customer equity and customer profitability. The first one identified those customers
who have set a long and strong relationship with the firm and are more likely to
contribute higher profits in the long period. On the other hand, second one evaluates
how one customer can impact or influence others in order to maximize the overall
value of the enterprise; finally customer profitability measures revenues received from
customers minus the cost of serving them.

However, due to the time limit for conducting this study, the scope of this research has
been restricted; therefore, the author only analyzed how to implement customer
profitability analysis and evaluate the potential usefulness of this tool.


This chapter will start with a deep description of the company case as well as an
explanation of how this firm measures its customer profitability currently, then it will
include the design of customer profitability analysis with time driven activity based
costing within Ecoinsumos, this is followed by an exploration of how this model could
help improve the current resource allocation process; The author has been divided
this chapter in six sub-chapters; they will be illustrated in the following picture.

Figure 2: Research findings and analysis scheme.

Company Description
Customer profitability
in the company case

Identity Gross Profits Estimate overheads

in the company case using time driven
activity based

Implementation of
a new customer
profitability model
with TDABC
(Make decisions
and taken actions)

Research findings and analysis scheme (Orjuela, C 2010)


As mentioned in the first chapter, Ecoinsumos Ltd is a Colombian agrochemical trader

company located in Boyacá (Tunja); the firm has been serving the needs and
requirements of its customers since 2003. Ecoinsumos supplies more than 9000
products from the largest manufacturers of agrochemical in Colombia.

Ecoinsumos distributes its products through local and rural retailers; although, the
company has a small transportation fleet (2 trucks), its CEO has designed an
“optimum” delivery route.

Nowadays, Ecoinsumos employs four people; despite its short personnel the company
reaches the whole geographic region, its staff is divided in two different areas, which
are: administrative and logistics departments. Administrative section has overall
responsibility for managing the office; this department is composed of a general
manager and an administrative assistant; office manager is responsible for interacting
with customers, suppliers and visitors. Beside this, ensuring the smooth running of the
office. In addition, in this area there is an administrative assistant who deals with
secretarial work; the role involves tasks such as: telephone answering, maintaining
office records, preparing shipment documents, invoicing, arranging meetings and
other assigned tasks.

On the other hand the duties of the logistic department involves warehousing, storage,
distribution and delivery; this department is entrusted with responsibilities of
guarantying that the whole process is performed on time. This area is composed of a
logistic manager and two logistics assistants. Logistic manager is specifically
responsible for ensuring that the goods reach the correct place as well as coordinate
the delivery process. The logistics assistants are in charge of unloading and loading
goods from the trucks, checking the delivery, shelving all the stock correctly, picking
goods, and dispatching and transporting the delivery. Furthermore, logistics
management area organizes processes to guarantee customer satisfaction, an
efficient transportation route, and stock control.

The company currently serves 264 customers, who have been grouped in five large
segments according to their location area (west, south, north, east and centre); each
one of these segments has their own characteristics. Thus, each needing different
sales approach.

The customers of the case company were defined as follows:

Group 1: Group 1 is located on the west of the region. That group includes small rural
retailers. These customers are situated at 60 km away from the warehouse.
Therefore, the company visits them twice a week; The Company has served this area
since 2005.

Group 2: This group is situated on the south of the region. They comprise large rural
retailers. According to the CEO this segment is the second most important group for
the company, the distance between this area and the warehouse is 73 km. The
company visits this group once a week.

Group 3: These customers are situated in the northern area of the region. This group
is relatively new for the company; Ecoinsumos started serving them from 2008.
However, nowadays they represent an important part of the business. In order to
serve these customers, the company spends two days in each visit; this area is the
furthest away from the warehouse. They get suppliers once a week.

Group 4: This customer group constitutes large retailers stores, this segment are
placed in the eastern region of Boyacá; this area is 70 km away from the warehouse.
The Company supplies this area twice a week. Due to they had the highest sales
percentage in the last year; the CEO considers this segment as the most important

Group 5: This segment includes local retailers stores, the customers clustered in this
group are located in the same area of the warehouse.


Ecoinsumos analyses its customers based on their gross profit and operating profit; Its
current customer profitability system includes the turnover of each customer, the direct
costs and overheads; furthermore, Ecoinsumos calculates the customer’s proportion
of sales versus total sales with the purpose of knowing how much of sales come from
each customer group.

This research presents the economic contribution of each customer group and
explains how the company allocates its sales, general and administrative expenses


Figure 3: Gross profit per customer

£30,000.00 EAST
£20,000.00 CENTRE

Source: (Orjuela, C 2010)

This bar chart illustrates the net margin generated by each customer group from June
2009 to June 2010. The gross profit was calculated as the sales revenues minus the
costs of goods sold, minus discounts. According to the income statement the eastern
region generated more gross profit than the others areas, However, this figure has to
be evaluated deeper because the cost to serve this area could be higher than the
west and central area.

For the centre area, gross profit was £ 20.303,22; this region recorded the lowest gross
profit figure.

The gross profit generated by customer group located in the northern region was
higher than customer group situated in the centre region; nevertheless, because of the
northern customers are located 210 km from the warehouse, they may consume more
resource, time and efforts.

Overall, all regions reported positive results. However, in order to get a more accurate
figure the company has to estimate its overhead costs.


Figure: 4 Segment’s contribution to the total sales


18% 15% SOUTH


Source: (Orjuela, C)
This pie graph shows, how much each customer group contributed to the overall sales
between June 2009 and June 2010; the income data reveled that the eastern region
contribution is considerably higher than centre, western and northern area.

The northern and western customers added almost the same amount of money to the

In general terms, the eastern region seems to be the most profitable area,
nevertheless, this figures are inexact until the researcher investigates the cost to
serve each customer group.



Ecoinsumos allocates its sales, general and administrative costs to its customer
groups based on the sales revenues per segment. It means, if a specific group
contributed 30% of the overall firm sales then 30% of the overheads would be traced
to them.

The cost allocated to each customer between June 2009 and June 2010 will be
illustrated in the next bar chart.

Figure 5: Costs allocated to each customer group: arbitrary approach

£14,000.00 WEST
£6,000.00 EAST
£4,000.00 CENTRE

Source: (Orjuela, C 2010)

This graph shows the indirect expenses of every customer group from June 2009 to
June 2010, the total overhead costs of that period-amounted £ 50.271,90. Due to the
centre region contributed more to the total sales than the northern and western areas,
its overhead costs were higher. Nevertheless, this figure could be inaccurate since
the time spent to serve this group might be smaller.

The western and northern region had approximately similar spent; this figure released
that these two regions contributed roughly the same amount of money to the
company. However, this figure did not reveled, which customer group consumes more
resources. Finally, since eastern region contributed more to the overall sales than any
other group, its indirect costs were the highest.

To sum up, from the author point of view, this arbitrary approach does not allow the
company to know the origin of its overheads and estimate the exact amount to serve
each individual customer.


Figure 6: Operating profit per customer under arbitrary approach

£30,000.00 SOUTH
£25,000.00 NORTH
£20,000.00 EAST

Source: (Orjuela, C 2010)

The operating profits per customer were estimated as the gross profit minus overhead
costs, this bar chart illustrates how much every region generated to the company after
deducting its sales, administrative and general costs. The total operating profit
summed to £ 130.036,75

After reducing the overhead costs the eastern region also recorded more operating
profit than the any other segment, this figure will be contrasted once the researcher
determines the indirect costs through time driven activity based costing.

For the centre area, operating profit amounted to £11.264; this region presented the
lowest operation profit. Nonetheless, under TDABC model this figure could be
different. In addition, the southern region almost trebled the operating profit generated
by the centre region.

To conclude, operating profit figures reflected that the company case is performing
well, however, it needs a more accurate costing system to allocate its costs among its
customer groups.



In order to recognize how much each customer contributes to the total profitability
within the company case, the researcher must know and understand the gross
profit per customer and the exact amount to serve each one of them. Due to the
approach (arbitrary approach) used by Ecoinsumos to estimate its customer-service
costs has been considered as inaccurate and inadequate for many authors, this
research presents a suitable option to understand costs and improve the quality of
customer profitability analysis.


As mentioned earlier, the gross profit per customer was calculated from the gross
margin product, which is in turn, the revenue received from each customer group
minus the costs of goods and discounts. The discounts are given to the customers
according to the operating profit. Therefore, the following table will illustrate the gross
profit per customer during the period between June 2009 and June 2010.

Table 1: Gross profit per customer


WEST £ 30.224,93

SOUTH £ 44.000,23

NORTH £ 26.239,56

EAST £ 56.802,25

CENTRE £ 20.303,22

Source: (Ecoinsumos income statement)


As mentioned in the literature review, allocating selling, general and administrative
costs to customers according to the revenues provides companies imprecise
information. That is because of, the cost to serve each customer could differ
depending on the geographic location, the order size and the amount of resource and
time that each customer consumes.
Therefore, time driven activity based cost approach faced the limitations of previous
cost accounting systems, this model has provided a better way for capturing the
complexity of actual operations.

In order to show how time driven activity-based costing can be implemented in the
company case, the author took as reference, the model described in the previous

Stage 1

The starting point to design the model consisted of recognizing those resources
needed to perform the activities in the company case; these details were gathered
according to the income statement. The resources expenses and their costs were
summarized in the table below.

Table 2: Current costs of the company case

Resource Expense £

Rent £ 5.423,46

Salary £ 24.947,93

Stationary £ 361,56

Telephone £ 2.169,39

Energy £ 520,65

Water £433.88

Truck Depreciation £ 6.074,28

Truck Operating £1.084,69
Travel expenses £ 9.256,04

Total £ 50.271,90

Source: (Ecoinsumos income statement)

Stage 2
In the second step, the researcher allocated the costs to the two company’s
departments (administrative and logistics sections). Due to the departments
consumed all resources none expense was treated as a period cost.

Thus, the total cost of administrative department summed to £21.284,45 [Cost of the
rent (£ 2.711,7)+ cost of salaries (£16.215,55)+ cost of stationary (£ 361.56)+ cost of
the telephone bill (1.518,573) + cost of energy and Water (£ 477,26)].

Because of the head office and the warehouse are at the same location the cost of the
rent, the energy and the water were split between both departments. Furthermore, the
cost of the salary was taken from the payroll and the cost of the telephone was
estimated according to the telephone bills. In addition, truck and travel expenses were
not traced to this department. All estimations were recapitulated in the following table.

Table 3: Estimation of the costs (administrative department)

Resource Expense % Resource Calculation Cost allocated

Rent 50% £ 5.423,46 * 0.5% £ 2.711,7

Salary £ 16.215,55

Stationary 100% £ 361.56 * 1 £ 361.56

Utilities 50% £ (520.65+£433.88)* 0.5 £ 477,26

(water + energy)
Telephone £1.518,57

Total Cost £21.284,45

Source: (Orjuela, C)

In addition, the total cost of logistics department amounted to £ 28.986,55 [Cost of the
rent (£ 2.711,7)+ cost of salaries (£ 8731.45) cost of the telephone bill (£ 650,82)+
cost of energy and Water (£ 477,26)+ cost of truck depreciation (£ 6.074,28)+ Cost of
truck operating (£1.084,69)+ cost of travel expenses (£ 9.256,04)].

All costs associated to this department were summarized in the table below.

Table 4: Estimation of the costs (Logistic department)

Resource Expense % Resource Calculation Cost allocated

Rent 50% £ 5.423,46 * 0.5% £ 2.711,7

Salary £ 8731.45

Telephone £ 650,82

Utilities 50% £ (520.65+£433.88)* 0.5 £ 477,26

(water + energy)
Telephone £ 650,82
Truck Depreciation £ 6.074,28

Truck Operating £1.084,69

Travel Expenses £ 9.256,04

Total Cost £28.986,55

Source: (Orjuela, C)

Stage 3

Once determined the costs of each department, the next stage consisted of estimating
the practical capacity of the resources. According to Kaplan and Anderson (2004) the
cost of the departments can be traced to the customer groups based on the practical
capacity of the employees. Therefore, for the purpose of this research the author
estimated the theoretical and practical capacity of the employees as follows:

As mentioned earlier, the company case employs four people, their staff who are in
the administrative department works 8 hours per day (theoretical capacity); both of
them work 24 days in a month. In this case their theoretical capacity would be 23.040
[(8 hours * 60 minutes) * (24 days) * (2 employees)] minutes per month or said in
another words 276.480 minutes per year. However, due to employees have idle time,
costs cannot be traced to customers at full capacity. According to the CEO these two
employees spend approximately 5% of their time for breaks. Thus their real capacity
would be 262.656 minutes per year.

On the other hand, in the logistic department both employees work 6 hours a day and
24 days a month. Nevertheless, one of the logistic assistants must transport the
delivery twice a month to the northern region, these two days the employee works 6
extra hours; thus the full capacity of this department would be:

Capacity of the logistic assistant with extra hours= [(6 hours * 60 minutes) * (22 days)]
+ [(12 Hours * 60 minutes) * (2 days)]= 9.360 minutes per month
Capacity of the logistic assistant without extra hours= [(6 hours * 60 minutes) * (24
days)]= 8.640 minutes per month

Theoretical capacity of the logistic department= 18.000 minutes in a month or 216.000

minutes per year.

Finally, the workers of this department also use 5% of their work time for taking
breaks, thus the practical capacity of this department is 205.200 minutes per year.

Stage 4

The fourth stage concerned calculating the cost of one time minute in administrative
and logistic departments; this cost was calculated based on previous estimations.
According to the literature, the unit is estimated by dividing the total cost of each
department by the practical capacity. In order to clarify this stage the author built the
following table:

Table 5: Cost of one minute of both departments.

Department Total Practical Calculation Cost of one

Cost Capacity time minute
Administrative £21.284,45 262.656 minutes 21.284,45 / 262.656 £ 0.081
Logistic £28.986,55 216.000 minutes 28.986,55 / 216.000 £ 0.134

Source: (Orjuela, C)

Stage 5
The fifth stage was divided in two; first, the researcher recognized those process
related to serve customer groups, and then estimated the times required to perform

Thus, The principal process linked to customer within administrative department was:
taking customer orders; according to the information provided by the CEO and
employees this process is subdivided into three different activities; each one of them
add a time part to the customer-order time equation.

In order to understand how this process is performed in the company case and the
time of each activity the researcher recorded the next interview.

Taking customer orders: This process starts with a pre sales call; the duration of this
task is 5 minutes per call, this time is the same for all regions. However the whole
duration of the activity depends on the number of calls per area. Next the
administrative assistant calls customers again for taking the order; the time spent in
this activity is 1 minute to connect the customer, plus an extra 15 seconds (0.17
minutes) for each ordered line item; thus, the time of this activity depends on the
length of the order and the number of calls. After taking the order, the administrative
assistant enters the order into the computer. This operation takes 15 seconds for each
ordered line. Finally, the order is printed; this activity takes around 1 minute per
invoice. In addition, each invoice cans maximum include 20 line items.

In addition the general manager can also do all of these activities. The following table
summarized the information gathered in the interview.

Table 6: Description of administrative activities.

Sub activity Time Driver Time consumption

Pre sales activities Number of pre sales calls 5minutes per call

Taking the order Number of sales calls and 1 for each call + 0.17 minutes for each
Number of ordered line items ordered line item
Entering the order Number of ordered line items 0.17 minutes for each ordered line item
Into the system
Printing the order Number of invoices 0.5 minutes for each invoice

Source: (Orjuela, C)

The interview released that the time for performing this process depends on many
variables; therefore the cost of each customer must be traced according to them.

Furthermore, the researcher also indentified the principal processes within logistic
department, as well as the time to perform them. The process associated with the
customers within this department was: processing and delivering the order. As was
done in the last department, the researcher also interviewed the CEO and both
employees who work in this department in order to get a better understanding of the
different activities and their times.
The interview revealed the following details:

Processing and delivering customer orders: When the logistic staff receives the order,
the worker read it, and finds the inventory; this activity takes around 2 minutes for
each invoice. After that, the employee picks the cases needed and load them; the time
spent on this activity is 0.5 minute per case. Next, the delivery is transported to each
customer; the length of this activity depends on the distance between the warehouse
and the region where the customer groups are located and the times that the driver
goes to each region per year, the time was estimated according to the details provided
by the CEO.

Interview information was recorded in the table below:

Table 7: Description of logistic activities

Sub activity Time Driver Time consumption

Reading the order and Number of invoices 2 minutes for each invoice
Finding the inventory
Picking and Loading Number of cases 0.5 minute per case
Group 1: 360 minutes per travel
Reaching the customer Group 2: 360 minutes per travel
And coming back to the Number of travels Group 3: 1440 minutes per travel
warehouse Group 4: 360 minutes per travel
Group 5: 120 minutes per travel

Stage 6

The interview released that these processes depended on more than one variable;
therefore, in order to capture the complex situations, the researcher derived the next
two equations for calculating the time required to perform the processes:

Taking the order time = (time spent on one pre sale call * X1) + ((time spent on one
sales call * X2) + (time spent on writing one ordered item * X3)) + (time spent on
entering one order into the system * X3) + (time spent on printing one invoice* X4)

Taking the order time = (5 * X1) + ((1* X2) + (0.17*X3))+ (0.17 * X3) + (0.5 * X4)

Where X1= Number of pre sales calls

X2= Number of sales calls
X3= Number of ordered line items
X4= Number of invoices

Processing the order time = (2 * X1) + (0.5 * X2) + ((360 * X3)* (X4)) + ((360 * X5) *
(X6)) + ((1140 * X7) * (X8)) + ((360 * X9) * (X10)) + ((120 * X11) * (X12))

Where X1= Number of invoices

X2= Number of cases
X3= 1 if group 1, 0 if not
X4= Number of travels group 1
X5= 1 if group 2, 0 if not
X6= Number of travels group 2
X7= 1 if group 3, 0 if not
X8= Number of travels group 3
X9= 1 if group 4, 0 if not
X10= Number of travel group 4
X11= 1 if group 5, 0 if not
X12= Number of travels group 5

These equations allowed calculating the time of these processes according to the
characteristic of each order and each customer group.

Stage 7

This stage was not included in the previous model. However, due to the author
needed to identify the number of calls, travels, ordered line items, cases and invoices
by each customer group, it was incorporated. These figures were the support for
estimating the total minutes that the company spent with each customer group.
According to the CEO the details clustered were:

Table 8: Number of calls, travels, ordered line items, cases and invoices by each
customer group

No. Customers Travels per year Pre sales calls Sale calls No Invoices No. Order lines No. Cases
Group 1 75 48 3600 2880 2880 8640 10250
Group 2 30 48 1440 1152 1152 3456 8500
Group 3 72 48 3456 2592 2592 7776 6500
Group 4 48 96 4608 3456 3456 10368 15000
Group 5 39 96 3744 2808 2808 8424 16000
Total 264 336 16848 12888 12888 38664 56250

Source: (Orjuela, C)

Stage 8

This stage consisted of allocating the costs to each customer group. In order to do
that, the researcher established the total time that the company spent with each
segment during the whole year and then this time was multiplied by the cost of one
unit time (see stage 4).

Length times were estimated according to the equations derived in the stage 6 and
the table designed in the stage 7. For instance the time dedicated to group one by
administrative department was defined as follows:

Taking order time = (5 * number of pre sale calls) + ((0.5* number of calls to take the
orders) + (0.17* number of ordered line items))+ (0.17 * number of ordered line items)
+ (0.5 * number of invoices)

Taking the order time= (5 * 3600) + ((0.5 *2880) + (0.17 * (8640)) + (0.17 *8640) +
(0.5 *2880)

Taking the order time= 25.257,6 minutes

The cost allocated to segment one by the administrative department was £2.045,87
(25.257,6 * 0.081).

In addition this estimation was done with all customer groups, according to the
characteristics of each one of them.

The following table illustrates the allocation of the costs to the different segments by
the administrative department under time driven activity based costing.

Table 9: Cost to serve each customer: Administrative Department

Time spent on Time spent on Time spent on Time spent on minutes Rate Allocated cost

Pre sale calls Taking the order Entering the order Printing the order

Group 1 18000 4348.8 1468.8 1440 25257.6 £0.081 £2,045.87

Group 2 7200 1739.52 587.52 576 10103.04 £0.081 £818.35

Group 3 17280 3913.92 1321.92 1296 23811.84 £0.081 £1,928.76

Group 4 23040 5218.56 1762.56 1728 31749.12 £0.081 £2,571.68

Group 5 18720 4240.08 1432.08 1404 25796.16 £0.081 £2,089.49

Total 84240 19460.88 6572.88 6444 116717.76 £0.081 £9,454.14

Source: (Orjuela, C)

Furthermore, length times dedicated to each customer group by the logistic

department were estimated in the same way. However, it was defined according to the
second equation derived in the stage 6. For example, the total time spent on group
two was established in this way:

Processing the order time = (2 * number of invoices) + (0.5 * number of cases) +

((time spent on reaching customer 2 * 1) * (number of travels to reach customer 2))

Processing the order = (2 * 1152) + (0.5 * 8500) + ((360 *1) 48))

Processing the order time = 23834 minutes

The cost traced to segment two by logistic department was £3774 (23834*0.134)

The following table shows the allocation of the costs to the different segments by the
logistic department under time driven activity based costing.

Table 10: Cost to serve each customer: Logistic Department

Time spent on Time spent on Time spent on Total minutes Rate Allocated cost
Picking and
Reading the order loading Reaching the customer

Group 1 5760 5125 17280 28165 £0.134 £3,774.11

Group 2 2304 4250 17280 23834 £0.134 £3,193.76

Group 3 5184 3250 69120 77554 £0.134 £10,392.24

Group 4 6912 7500 34560 48972 £0.134 £6,562.25

Group 5 5616 8000 11520 25136 £0.134 £3,368.22

Total 25776 28125 149760 203661 £0.134 £27,290.57

Source: (Orjuela, C)

Stage 9
Finally, The last stage concerned allocating the total cost to each customer group. All
costs were summarized in the table below. These figures were used to build the new
customer profitability model.

Table 11: Cost allocated to each customer group

Cost allocated by Cost allocated by Total cost to serve
Administrative department Logistic department
WEST £2,045.87 £3,774.11 £5,819.98
SOUTH £818.35 £3,193.76 £4,012.10
NORH £1,928.76 £10,392.24 £12,321.00
EAST £2,571.68 £6,562.25 £9,133.93
CENTRE £2,089.49 £3,368.22 £5,457.71
Total £9,454.14 £27,290.57 £36,744.71
Source: (Orjuela, C)

In order to explain how this new model could help improve the current resource
allocation process, the researcher will contrast the old approach to trace costs to
customers (arbitrary approach) with the new one (time driven activity based costing).
According to the literature time-driven activity based costing offers a better picture of
the customer costs and improves the quality of customer profitability analysis. Then,
the author will build the new customer profitability model.


Under previous approach (arbitrary), costs were allocated to the customers according
to their revenues; these figures provided wrong information since they did not
measure the amount of resource, time and effort that every customer consumed. The
following bar char illustrates how the cost to serve each customer group varies
depending on the costing system.
Figure 7: Cost to serve under both approaches

£14,000.00 Cost to serve
£12,000.00 under arbitrary
£10,000.00 approach
£6,000.00 Cost to serve
£4,000.00 under TDABC






Source: (Orjuela, C)

The arbitrary approach allocated more costs to customers than time driven approach;
the new model recognizes that the employees spend time on activities not related to
The arbitrary approach allocated more costs to customers than time driven approach;
the new model recognizes that the employees spend time on activities not related with
customers; therefore, these costs are traced as period costs not as customer costs.

Under the arbitrary approach the eastern region had been the most expensive area to
serve. However, after analyzing the consumption of resources and time of each
customer group, the northern region was more expensive. This figure reveled a more
accurate result since this area needed more distribution support than any other zone.

Another important finding released that the centre region ordered more cases than
any other area; nonetheless, it was not reflected in its final profitability, it leads the
author to conclude that the product margin can also affect customer margin.
Furthermore, the model let the chief executive to identify that this zone required a high
level of customized service.

To sum up time driven activity based costing provided the company case accurate
figures such us: time, resources and efforts dedicated to sales support activities,
purchasing patterns, and distribution support, this information is relevant because of
the company could estimate its real costs to serve each segment.

As mentioned during the whole research customer profitability analysis is based on

two variables: the gross profit and the cost to serve. The table below shows the real
profitability of each customer in the company case. According to these figures, the
author will provide some suggestions of how this model improves the allocation of the
resources, time and efforts in the last chapter.

Table 12: Customer profitability under time driven activity based costing.

Customer profitability West South North East Centre

Gross Profit £ 30,224.93 £ 40,000.23 £ 26,239.56 £ 56,802.25 £ 20,303.22
Cost to serve West South North East Centre
Cost allocated by £2,045.87 £818.35 £1,928.76 £2,571.68 £2,089.49
Administrative department
Cost allocated by £3,774.11 £3,193.76 £10,392.24 £6,562.25 £3,368.22
Logistic department
Total cost to serve £5,819.98 £4,012.10 £12,321.00 £9,133.93 £5,457.71

Operating Profit £24,404.95 £35,988.13 £13,918.56 £47,668.32 £14,845.51

Source: (Orjuela, C)

As seen in the table all customers groups are profitable; however, their contribution to
the total profitability changed, before implementing the model the CEO taught that the
centre region was the least profitable, nevertheless, after analysing the consumption
of resources, time and efforts, he recognized that the northern region required more
logistic support than any other zone which in turn affected its profitability.

This model also released that the logistic activities represent the most important part
of the total cost to serve, therefore, the regions that need more logistic support are the
most expensive zones.

The eastern region is still the most profitable area and the southern region seems to
be a good area for exploiting, since this zone required the least administrative and
logistic support.

Therefore, from this point onwards all decisions related to customer resource
allocation in the company case can be done based on these figures. If the company
realizes how performed its activities and distributes its times among its customers its
decisions will not be taken random.

To conclude an adequate implementation of time driven activity based costing and

customer profitability analysis provide companies helpful data and information to
maximize the utilization of resources, time and efforts, which may lead to higher

This research illustrated how customer profitability analysis with time driven activity
based costing can be implemented in a wholesaler agrochemical company; this model
was designed with the purpose of improving the allocation and utilization of the
resources, time and efforts.

Throughout history many theoretical and practical studies have recognized the need
for customer profitability analysis, most of these articles and empirical findings
documented that this technique has always been included in decisions making
process as a tool for tracing costs to customers and allocating resources among them.

The research revealed that the design of any customer profitability analysis contains
two principal elements; the cost to serve each customer and the gross profit, this study
has focused on the first component, therefore, in order to understand costs in the field
of customer profitability the author developed a deep study in the subject, According
to the literature enterprises have used different costing management systems
(traditional method, ABC and Time Driven ABC), after analysing the advantages and
drawbacks of each one of them, the author decided to implement customer profitability
with time driven activity based costing. This decision was taken based on the results
that this method has released on previous studies.

This research presented two interesting successful applications of the model in the
real context (Kemps LLC and Sanac), in both cases, the implementation of this
technique offered the benefits recognized by Van Raaij (providing greater service to
profitable customers and managing costs and revenues more accurate). After the
valuable information produced by this research, the CEO recognized that this tool
could also generate many advantages to its enterprise.

According to the literature, Hudig (2007) claimed that this technique could be
implemented in any kind of firm; this statement was consistent with the research
findings, because of, despite the construction of the model was complex, the
technique could be developed in the company case.

At the beginning, the design of the model was a challenging task, since the author
only found one research in the same industry; however, studies developed in other
industries provided the support for building the tool in the company case.

Prior to the implementation of this model, the CEO did not realize how important was
to gather information related to customers; although the company had analyzed its
customers based on their gross profit and operating profit, these figures did not
recognize the origin of the costs and the exact amount to serve each customer group.
Therefore, the information provided by these measures was inaccurate.

The development of this helpful tool in the company case released a whole picture of
the customer costs; through this analysis the CEO understood the differences of its
customer groups in terms of what each one of them represents to the firm and how
customer profitability margin change from one customer to another. This finding is
also consistent with the customer profitability literature.
To conclude, this model enabled the resource allocation process in the company
case, therefore, now its available resources are assigned to the customer groups
according to the new figures.


Before implementing customer profitability analysis with time driven activity based
costing, the CEO did not realize where the company truly arise its profits, therefore,
the resources, time and efforts were divided arbitrarily. This useful tool, which more
accurately reflects costs and revenues of each customer group, provided the firm a
broader vision for developing customer services strategies.

After implementing the model, the firm could recognize how much every customer
contributed to the total revenue, and the amount of time that each one of them
required; these figures are particularly relevant because the company can prioritize its
efforts and invest in those customers who are most likely to be profitable.

Furthermore, This helpful tool allowed the CEO to recognize where the company
needed to enhance its productivity.
Thus, according to the company’s business environment and the figures released for
the model, the author offers the following recommendations:

The new model revealed that administrative employees spend many time on activities
not related to customers or have more idle time; thus, if the company case wants to
develop customer centric strategies, the CEO should concentrate on evaluating how
its staff are distributing their time. For instance, one strategy could be to dedicate
more time to the eastern region, which is the most profitable area.

The implementation of this tool offered the CEO with a chance to recognize the time
spent on each activity and each customer; The CEO realized that the northern region
consumed more time and resources than any other zone, Therefore, if the company
wants to improve the allocation of its time, it should take appropriate measures with
the purpose of reducing the time dedicated to this segment. For example, one strategy
might be to decrease the number of travel per year but instead spending more time on
every customer in each travel.

This model provided the CEO with profitable reports for every customer group;
according to the results all segments contributed to the final profitability; however,
some of them added more value to the company than others. Therefore, based on
these figures the company could develop a customer classification system depending
on profitability that allows allocates its resources more accurately.

As mentioned in the first chapter, the delivery route designed by the CEO did not
permit the company to minimize costs, since it did not recognize the time and resource
needed to serve each customer group; nevertheless, the new customer profitability
information offered the CEO a wider idea of the total cost per route. According to
these details the company should try to renegotiate the number of visits with
customers located on the northern region. A suitable option could be to offer better
prices if they order large amounts; however, these discounts cannot exceed the total
cost per travel.
Once the company knows its cost to serve each customer group, it can develop new
pricing programs, the new prices can be determined according to the market and the
amount of resources, time and efforts dedicated to each sector. Therefore, prices
cannot be the same for all areas.

The discounts that the company gets from its suppliers should be given to those
customers who are contributing more to the final profitability, in this case, the eastern

To sum up, all recommendations mentioned above are based on the findings released
for this study; however, this analysis is only the starting point for further researches.
For instance, studies in the field of customer lifetime value and customer equity could
increase the value of these results.



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The purpose of this questionnaire is to get a better understanding of what is the

company about.
According to the company’s details could you please fill in the following table?

1. General Information

Company Name

Type of organization





Core business:

Served area:

2. Personnel and organizational structure:

How many employees does the company have?

How is the organizational structure of the company?

3. Financial Information

Revenues 2009 and 2010 Pesos Pounds £

Year (2009)

Year (2010)
4. Suppliers

Could you please list the main suppliers?



4. Competitiveness:

Which are the main competitors?

How does the company compare to its main competitors?



The purpose of this interview is to explore the business environment

1. In few words could you describe the company’s business environment?

2. Which has been the most relevant change in the market during the last three
3. How have the external effects influenced the organization decisions?

4. What kinds of measures have used the company to face the new business

5. Have these measures increased the company’s costs?




This interview aims to recognize how employees operate currently. As well as define
the theoretical and practical capacity of each employee

1. How many people do the company employ currently?

2. How are the employees distributed among the company?

3. Could you please identify the position of each worker?

4. Could you please say the principal responsibilities, tasks and functions of each

5. How many hours does each employee work per day?

6. How many days do they work per week?

7. Do the employees have idle time?

8. Could you please estimate their idle time?

9. In order to know how the employees distribute its time could you please fill in the
following table?

Cost Pool Time Dedicated Time Dedicated

To department 1 To department 2
Idle Time

Employee 1

Employee 2

Employee 3

Employee 4



1. Which is your position in the company?

2. Do you know the position of your colleagues?

3. Which are your principal responsibilities, tasks and function in your position?
4. How many hours do you work per day?

5. How many days do you work per week?

6. Do you have idle time?

7. Could you please estimate your idle time?

8. How do you distribute your time during a normal day?



The aim of this questionnaire is to understand how the company segments its

1. How many customers do the company serve currently?

2. According to the delivery route designed could you classify the different customers
groups in the following table?

3. Could you please give a description of each customer group?

Customer Type of Customer Location Number Number of

customer Description of visits customers
per year Per segment


The purpose of this questionnaire is to get a better understanding of how costs are
traced to the different company’s departments.

1. According to the company structure could you please list the principal departments?

2. How has the company distributed its expenses among the departments?

3. In order to know how the company allocates costs to its departments could you
please fill in this table?
COST POOL Department 1 Department 2 Unused Capacity

% £ % £ % £



This interview aims to understand how the company serves its customers.

1. In order to serve customers how many activities do your employees perform?

2. Could you please describe these activities?

3. How much time do your employees spent on each activity?

4. Do the duration of the activities depend on the circumstances?

5. Could you please identify the circumstances that could change the time of the

6. How do activities vary between customers?



1. In order to serve customers how many activities do you perform?

2. Could you please describe these activities?

3. How much time do you spent on each activity?

4. Do the duration of the activities depend on the circumstances?

5. Could you please identify the circumstances that could change the time of the
6. How do activities vary between customers?