ABC FOR AMAZON

Oliwia Jantarska, Kalina Raus, Nicola Włodarczyk, Abdullah Gabein

Abstract
In this report the Activity Based Costing for the process of placing an order in Amazon.com, Inc. has
been conducted in order to compare the cost allocation to two types of customers: the Basic Customer
and the Premium Customer. To prepare a thorough information about the costing in the company, we
have investigated the whole structure and procedures that appear in Amazon. Moreover, the
processes and corresponding costs have been studied in detail in order to provide accurate analysis of
Activity Based Costing which can be further used during Activity Based Management.

1 ACTIVITY BASED COSTING

Activity Based Costing (ABC) is a technique within Activity Based Management. Activity Based
Management, however, is the whole method which analyzes activities to make decisions regarding
costs reduction.
Activity Based Costing is a useful technique which aims at calculating overhead costs of the processes
in order to get more accurate data about the allocation of indirect costs. It consists of 5 phases:
1. Understanding the purpose of ABC and planning the system.
2. Defining and analyzing resource categories.
3. Defining and analyzing activities, and creating activity flow diagram.
4. Determining resource drivers and establishing activity cost pools.
5. Determining activity drivers, assigning costs to cost objects, and finalizing the ABC.

There are numerous benefits of implementing ABC technique in costs analysis, such as the ability to
properly formulate pricing decisions thanks to precise cost information. Moreover, appropriate product
mix decisions can be made based on accurate profitability information provided by Activity Based
Costing.
The usage of this technique is especially vital when competition is high as ABC can give you the
competitive advantage on the market thanks to better costs allocation. It is also recommendable to
follow this technique when your product mix is diverse in terms of batch size, physical size, degree of
complexity and raw material characteristics.

2 THE COMPANY
Amazon is a multinational technology company that specializes in e-commerce, cloud computing,
digital streaming, and artificial intelligence. It has been often referred to as “one of the most influential
economic and cultural forces in the world” and it is often regarded as one of the world’s most valuable
brands. Amazon was founded by Jeff Bezos in 1994. Initially, it was an online marketplace for books,
however it has expanded over time into a multitude of product categories. As of 2023, it has been the
world’s largest online retailer and marketplace. Here is an overview of its structure, procedures, and
costs:

2.1 Structure
Amazon is organized into several business segments, including:

2.1.1 Amazon Retail

The company's core e-commerce business, which sells a vast range of consumer goods online.
Amazon's retail segment is its original and core business, offering a wide range of products for sale on
its online marketplace, Amazon.com. This includes electronics, books, household items, fashion,
groceries, and more. Amazon earns revenues from the sale of these products, and the costs
associated with purchasing or producing the products, shipping, fulfilment, and other operational
expenses are considered as costs of goods sold and operating expenses. Amazon also offers services
like Amazon Fresh for grocery delivery, Amazon Pantry for household items, and Amazon Prime for

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subscription-based benefits like free and faster shipping, which contribute to its retail segment's
revenues.

2.1.2 Amazon Web Services (AWS)

The company's cloud computing platform, which provides a wide range of infrastructure and services
for businesses of all sizes. AWS is Amazon's cloud computing platform that offers a wide range of
cloud-based services to businesses and individuals. This includes computing power, storage,
database management, machine learning, artificial intelligence, Internet of Things (IoT), etc. Amazon
Web Services generate revenues through usage-based pricing, where customers pay for the services
they use, and also offer various support and consulting services. AWS has been a significant driver of
Amazon's revenue growth and profitability, serving millions of customers worldwide, including startups,
enterprises, and governments.

2.1.3 Amazon Prime Video

Amazon Prime Video is a subscription-based streaming service that offers a wide range of TV shows,
movies, and other video content for streaming on demand. Amazon generates revenues from Prime
Video through subscription fees, as well as through advertising and partnerships with content creators.
Prime Video is part of Amazon's broader strategy to offer a comprehensive ecosystem of services
through Amazon Prime, which includes benefits like free and faster shipping, access to Prime Video,
Prime Music, Prime Reading, and more.

2.1.4 Amazon Advertising

The company's advertising business allows other businesses to advertise on Amazon's platform.
Amazon Advertising is a fast-growing segment that generates revenues through advertising services
offered on its platform. This includes sponsored product listings, display ads, video ads, and other
advertising formats that allow sellers to promote their products on Amazon.com. Amazon Advertising
leverages its vast customer data and advanced targeting capabilities to help sellers reach their target
audience and drive sales. It has become a significant source of revenue for Amazon and is a key
player in the digital advertising industry.

2.1.5 Other businesses

Amazon has various other businesses that contribute to its overall revenues. This includes
subsidiaries like Whole Foods Market, an upscale grocery store chain; Amazon Pharmacy, an online
pharmacy offering prescription medication delivery; Amazon Devices, which includes hardware
devices like Kindle e-readers, Echo smart speakers, and Fire TV streaming devices; and others like
Amazon Studios, which produces original TV shows and movies, and Amazon Books, which operates
physical bookstores. These businesses, while smaller in revenue compared to Amazon's core
segments, contribute to the overall diversity and growth of the company.

2.2 Procedures
2.2.1 Ordering
Customers can order products on Amazon's website or mobile app. They can choose from a wide
range of products, pay using a variety of payment methods, and select different shipping options.
Ordering is the process by which customers place an order for products on Amazon's online
marketplace. Customers can browse and search for products, add them to their cart, and proceed to
checkout. During checkout, customers provide their shipping address, payment information, and
choose a shipping method. Once the order is confirmed, customers receive an order confirmation
email with details of their purchase.

2.2.2 Fulfillment
Amazon uses its vast network of warehouses and distribution centers to fulfill orders. It uses advanced
technology to optimize its operations and deliver packages quickly and efficiently. Fulfillment refers to
the process by which Amazon prepares and ships orders to customers. Amazon offers different
fulfillment options, including Fulfilled by Amazon (FBA), where sellers store their products in Amazon's
fulfillment centers and Amazon handles packing, shipping, and customer service, and Fulfilled by
Merchant (FBM), where sellers handle their own fulfillment. For FBA orders, Amazon picks, packs, and
ships the products on behalf of the sellers. For FBM orders, sellers are responsible for packing and

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shipping the products themselves. Amazon's fulfillment centers are strategically located worldwide,
and the company uses advanced technology and logistics to optimize the fulfillment process and
ensure fast and reliable delivery to customers.

2.2.3 Customer service

Amazon provides customer service through its website, mobile app, and phone support. It also has a
vast knowledge base that customers can use to find answers to their questions. Amazon places a high
emphasis on customer service. The company provides various channels for customers to contact its
customer service team, including online chat, email, and phone. Amazon's customer service team
assists customers with inquiries related to orders, shipping, returns, refunds, and other issues.
Amazon also has a self-service customer service portal where customers can manage their orders,
track shipments, initiate returns, and resolve common issues independently.

2.2.4 Returns
Amazon has a flexible returns policy, allowing customers to return products within a specified period
for a full refund or exchange. The returns process involves customers initiating a return request
through their Amazon account, printing a return label, and shipping the product back to Amazon or the
seller, depending on the fulfilment method. Once the returned product is received and inspected,
Amazon processes the refund or exchange. The company strives to provide a smooth and hassle-free
returns experience for customers, and the process may vary depending on the type of product, seller,
and location.

2.3 Processes and Corresponding Costs

2.3.1 Process Order
In the process of order fulfillment, once a customer places an order on Amazon's website or mobile
app, the order processing system captures the relevant details such as the item(s) ordered, quantity,
customer information, and shipping address. The system verifies the order for accuracy and
completeness, including payment details, and ensures that the item is available in stock.
The cost of processing an order can vary depending on the complexity of the order and the level of
automation used in the process. In 2020, Amazon reported net sales of $386 billion and processed 1.9
billion orders during the year. An average cost per order is equal to $1.

2.3.2 Check credit

To maintain a secure transaction process, Amazon performs a credit check when a customer places
an order using a credit card or any other payment method. The credit check involves verifying the
validity of the payment method, ensuring sufficient funds or credit limit, and confirming the authenticity
of the customer's information.
It's difficult to estimate the exact number of credit checks performed by Amazon in 2020. Assuming a
similar ratio of credit checks to orders as the previous year, with 1.9 billion orders processed in 2020,
the estimated cost of credit checks would be around $950 million (assuming an average cost of $0.50
per credit check).

2.3.3 Check stock

After an order is received, the order processing system checks the availability of the ordered item(s) in
the company's inventory. This involves accessing the inventory management system to determine the
quantity of the item(s) in stock. If the item is available, the process moves forward. If the item is out of
stock, the system may notify the customer about the unavailability or suggest alternative options.
It's difficult to estimate the exact number of stock checks performed by Amazon in 2020. Assuming a
similar ratio of stock checks to orders as the previous year, the estimated cost of stock checks would
be around $475 million (assuming an average cost of $0.25 per stock check).

2.3.4 Check delivery time

Once the order is confirmed and the item(s) are in stock, Amazon's system calculates the estimated
delivery time based on various factors such as the shipping address, selected shipping method,

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availability of delivery carriers, and the item's location. This information helps set customer
expectations regarding when they can expect to receive their order.
It's difficult to estimate the exact number of delivery time checks performed by Amazon in 2020.
Assuming a similar ratio of delivery time checks to orders as the previous year, the estimated cost of
delivery time checks would be around $380 million (assuming an average cost of $0.20 per delivery
time check).

2.3.5 Contact customer

Throughout the order fulfillment process, Amazon may need to contact the customer to provide
updates, address any issues, or seek additional information if required. Communication channels may
include email, SMS notifications, or direct contact through Amazon's customer support services.
It's difficult to estimate the exact number of customer contacts made by Amazon in 2020. Assuming a
similar ratio of customer contacts to orders as the previous year, the estimated cost of customer
contacts would be around $3.8 billion (assuming an average cost of $2 per customer contact).

2.3.6 Forward order to warehouse

After the order is processed, and all necessary checks are completed, the order information is
forwarded to the appropriate warehouse for fulfillment. This involves transmitting the order details,
including the item(s), quantity, and customer information, to the warehouse team responsible for
picking, packing, and shipping the order.
In 2020, Amazon fulfilled 3.4 billion products. Assuming an average cost of $0.10 per order forwarding,
the estimated cost of forwarding orders to warehouses would be around $340 million.

2.3.7 Send email to confirm shipping

Once the order is prepared for shipment, Amazon's system generates an automated email to the
customer confirming that the item(s) have been shipped. This email typically includes tracking
information, allowing customers to monitor the progress of their shipment and estimate its arrival.
It's difficult to estimate the exact number of confirmation emails sent by Amazon in 2020. Assuming a
similar ratio of confirmation emails to orders as the previous year, the estimated cost of sending
confirmation emails would be around $38 million (assuming an average cost of $0.01 per email).

2.3.8 Raise invoice

Simultaneously or shortly after the order is shipped, Amazon's system generates an invoice for the
customer. The invoice includes details such as the item(s) purchased, quantity, prices, any applicable
taxes or fees, and the customer's billing information. This invoice serves as a record of the transaction
and may be sent to the customer electronically or included with the shipped items.
It's difficult to estimate the exact number of invoices raised by Amazon in 2020. Assuming a similar
ratio of invoices to orders as the previous year, the estimated cost of raising invoices would be around
$950 million (assuming an average cost of $0.50 per invoice).

2.3.9 Assemble package and ship

Once the order is received by the warehouse, the warehouse team locates the item(s) in the inventory,
assembles the package, and ensures it is properly packed and secured for shipping. This process may
involve selecting appropriate packaging materials, adding any necessary inserts or documentation,
and applying shipping labels. The package is then handed over to the designated shipping carrier for
final delivery to the customer.
In 2020, Amazon's fulfillment costs were $57.5 billion. Assuming that the cost of assembling and
shipping products accounts for a significant portion of these costs (although it also includes other
expenses such as warehouse labor, packaging materials, and shipping carrier fees), the estimated
cost of assembling and shipping products would be around $50 billion.

3 THE PRACTICAL USAGE OF ABC METHOD

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 Table 1. Activities and corresponding costs.
Activity Traceable Cost ($)
1. Order process 386 billion
2. Check credit 950 million
3. Check stock 475 million
4. Check delivery time 380 million
5. Contact customer 3.8 billion
6. Forward order to warehouse 340 million
7. Send email to customer 38 million
8. Raise invoice 950 million
9. Assemble package and ship 50 billion

Total cost 442 933 000 000

Table 2. Activities and resource allocation.

Resource Resource costs Direct Resource driver Activities
assignment/ (in case of
Allocation allocation)

Warehouse Salary Allocation % time A3, A9

workers

Equipment Usage cost Allocation % time A1, A2, A4, A6

Warehouse Rent Allocation - A3, A9

Accountant Salary Direct - A8

Customer service Salary Allocation % time A5, A7

representative

Energy Energy receipt Allocation % time all

payment

Table 3. Number of Total Events or Transactions

Number of Total Events or Transactions

Activity Total Basic Customer Premium Customer

(in billions) (in billions) (in billions)

Order process 1.9 1.4 0.5

Check credit 1.9 1.4 0.5

Check stock 1.9 1.4 0.5

Check delivery time 1.9 1.4 0.5

Contact customer
1.9 1.4 0.5

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Forward order to warehouse
1.9 1.4 0.5
Send email to customer
3.8 1.4 2.4
Raise invoice
1.9 1.4 0.5
Assemble package and ship
1.9 1.4 0.5

Table 4. Number of Total Events or Transactions.

Activity Costs ($) Transactions Rate per

Transaction
(in billions) (in billions)
Order process 386 1.9 $1/order
Check credit 0.95 1.9 $0.5/order
Check stock 0.475 1.9 $0.25/order
Check delivery time 0.38 1.9 $0.20/order
Contact customer 3.8 1.9 $2/contact
Forward order to warehouse 3.4 1.9 $0.10/order
Send email to customer 0.038 3.8 $0.01/email
Raise invoice 0.95 1.9 $0.5/order
Assemble package and ship 50 1.9 $26/order

Table 5. Assignment of overhead costs to the Basic Customer.

Basic customer

Activity Rate Transactions Amount ($)

Order process 1 1.4 1.4

Check credit 0.5 1.4 0.7

Check stock 0.25 1.4 0.35

Check delivery time 0.20 1.4 0.28

Contact customer 2 1.4 2.8

Forward order to warehouse 0.10 1.4 0.14

Send email to customer 0.01 1.4 0.014

Raise invoice 0.5 1.4 0.7

Assemble package and ship 14 1.4 19.6

Total overhead (a) 25.984

Number of units A (b) 12.6

Overhead per unit (a)/(b) 2.062

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 Table 6. Assignment of overhead costs to Premium Customer.

Premium customer

Activity Rate Transactions Amount ($)

Order process 1 0.5 0.5

Check credit 0.5 0.5 0.25

Check stock 0.25 0.5 0.125

Check delivery time 0.20 0.5 0.10

Contact customer 2 0.5 1

Forward order to warehouse 0.10 0.5 0.05

Send email to customer 0.01 2.4 0.024

Raise invoice 0.5 0.5 0.25

Assemble package and ship 38 0.5 19

Total overhead (a) 21.299

Number of units B (b) 6.4

Overhead per unit (a)/(b) 3.328

Table 7. Cost comparison between Basic and Premium Customer.

Basic Customer ($) Premium Customer

($)

Process order overhead 25.984 21.299

Total cost per customer $2.062 $3.328

* For premium customers the cost of packaging is $38 and for basic customers the cost of packaging
is $14.

REFERENCES

[1] Amazon (2018) ‘Amazon Global Selling helps you expand worldwide’.
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[4] Boddy, D. (2012) Essentials of Management: A Concise Introduction. 1st ed. Harlow: Pearson
[5] Bratton, J. (2015) Introduction to Work and Organizational Behavior. 3rd ed. London: Palgrave
Macmillans,
[6] Coyne, K. P. and Balakrishnan, S. (1996) ‘Bringing discipline to strategy’