Activity-Based Costing ABC in Service Industries Research Paper

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Activity-Based Costing in Service Industries

Describe the company you researched in one to two (1-2) paragraphs.

Since many traditional industries that deal with goods for sale also offer some service, it was somewhat difficult to settle on a company that dealt in services exclusively. Home Depot or another of that sort would have been easy because they offer both, but the company used for this examination was State Farm. Insurance companies will sometimes offer real products to their customers, but the main product is insurance and State Farm is recognized as the largest seller of insurance of individual automobile insurance in the United States.

The company began selling insurance in 1922 and worked primarily with homeowners in the cities and in the country. The company did work with automobile owners, but because no laws had been passed at the time to require automobile owners to have any form of insurance, it was not a large part of the business. The company was started by G.J. Mecherle who was a retired rancher who wanted to help his neighbors retain their wealth (State Farm, 2012). Almost immediately though, the focus of the business turned to automobiles. The reason for this was that people did not have any means to make insure that particular investment. Mecherle worked with two other people to set up that first office. Now, the company has more than 17,000 agents assigned to a large number of local offices. The company has been so successful offering its services since that time that they have opened the State Farm Bank which serves the needs of its customers, as well as a roadside assistance business and a comprehensive website.

2. Discuss how a time driven ABC cost system can be implemented in the company you researched and the benefits that the use will yield to the business performance.

first of all, it makes sense that activity-based costing would be used in a service industry because it provides a clearer picture of the product that is being sold. Each activity that is being performed by an employee of the company can be broken down into a specific activity and assigned a value based on the specific activity rather than the product that consumes the activity (Szychta, 2010).

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This assignment can be based on the time it takes to perform the activity and this is preferable because it provides a better bound to the specific item. For example, a mechanic whose primary service for his dealership is the exclusive brake changer for that dealer. The company has assigned a time constraint regarding how long it should take to complete a brake job, and they pay a certain amount for that work. Whether the mechanic performs the service faster or slower, the individual receives the same amount for each brake job completed. The accounting for the individual jobs the mechanics complete for the dealer is made simpler because it is now a constant.

State Farm is an insurer whose agents perform specific tasks during their work day, but it is difficult to quantify exactly what the agents do. Therefore, it makes sense that State Farm would group a certain type of activity into a single group that can then be accounted for. These activities will be assigned a reasonable time for completion which will provide the employee some guidelines, but it will also allow an accounting department to streamline their business also.

As far as performance, this type of accounting is ideal because people need to understand the bounds within which they are to operate. The system would take a particular group of activities that a person does in performing a task. The benefit to the employee in this is that normally they would work at a certain pace that may or may not provide a benefit to the company. The time-driven activity-based costing allows the employees to see what they should be doing, according to the company, and allows the company to better evaluate the value o their employees based on the tasks they are able to perform. So, the benefits of the system are for both the employer and the employee.….....

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