Activity Based Costing at Amazon Essay

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This paper is a discussion on Activity-based costing (ABC), one of the costing methodologies used in business. The methodology essentially entails assigning a cost to the various activities of an organization, which range from planning and production to quality control, logistics, and distribution (Kaplan & Anderson, 2007). It also entails determining the amount of time required to perform the activities (Kaplan & Anderson, 2004). The cost and time are then used as a basis for determining the price of the organization's products or services. If properly implemented, ABC can deliver significant benefits to an organization, especially with respect to business performance and competitive advantage (Cokins, 2001). Focusing on Amazon, this paper discusses the use of time-driven ABC in e-commerce activities. First, a brief background of the organization is provided. Next, attention is paid to how a time-driven ABC system can be implemented in the organization and the associated benefits on business performance. The paper then examines how the ABC system can create competitive advantage for the organization in the marketplace as well as the potential impact of the system on online services compared to services provided via traditional channels.

Organizational Background

Amazon, an American multinational e-commerce and cloud computing firm, is the largest online retailer worldwide in terms of revenue and market capitalization. Operating out of its corporate headquarters in Seattle, Washington, the company has operations in several parts of the world including Canada, the UK, Germany, Netherlands, France, Italy, Australia, India, China, Brazil, and Mexico. The company serves tens of millions of customers, providing a broad variety of online services, including an internet marketplace, advertising, audio entertainment, educational programming, social cataloguing, as well as cloud computing. The online marketplace is the organization's major revenue earner. The website provides an e-platform for buyers and sellers to meet. Amazon offers thousands of products that can be purchased from the website, ranging from books and audio content to consumer electronics, clothing, fashion accessories, furniture, toys, video games, and household items. Founded in 1994 as an online bookstore, Amazon has become the world's largest player in the online retailing space. The company has extensively revolutionized the world of e-commerce.

Implementing ABC and Associated Benefits

Though the ABC method is traditionally used in the manufacturing industry, it can as well be used in the service sector (Stefano & Filho, 2013).
By adopting the ABC system, Amazon can reap significant benefits. Nonetheless, this can only be achieved with proper implementation. In many cases, adopting ABC ends up being a disaster largely due to poor implementation. The first step in implementing ABC is to have a comprehensive understanding of the management of the system and their role throughout the entire process (Cokins, 2001). Without management commitment and understanding of the system, is quite unlikely that the undertaking will be fruitful and sustainable in the long-term.

It is important to conduct a pilot-run first, prior to rolling out the system in full (Kaplan & Anderson, 2007). Indeed, a pilot-run is often more important for large organizations. Amazon is a large organization, which makes piloting appropriate. The pilot-run may involve one of the departments or business units, especially the least profitable one. Though targeting the least profitable department appears risky, it may provide an opportunity to improve the department through ABC-oriented management. For Amazon, the customer support department can be used to test the system, for instance. The department is involved in, among other activities, processing and responding to customer complaints. A pilot run enables the organization to gain a better understanding of the system before full implementation, especially with respect to its successes and failures. For instance, success of the system in the customer support department or unit would mean that the rest of the organization could benefit from the system as well.

To implement the system, the management can create a team to supervise, coordinate, and oversee all related processes (Cokins, 2001). Having a team would be of significant advantage in terms of ensuring accountability. At times, however, it may be more helpful to hire an independent, external consultant with extensive experience in the area. An important role of the team or the consultant would be to identify and assess the activities that require revision so as to optimize costs and profit margins (Kaplan & Anderson, 2007). This entails selecting activities that need activity-based costing, identifying aspects of the activities that involve unnecessarily huge costs, and determining the activities fixed and variable costs. More fundamentally, the….....

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Cokins, G. (2001). Activity-based cost management: an executive's guide. Hoboken: John Wiley & Sons.

Kaplan, R., & Anderson, S. (2004). Time-driven activity-based costing. Harvard Business Review, November Issue.

Kaplan, R., & Anderson, S. (2007). Time-driven activity-based costing: a simpler guide and more powerful guide to higher profits. Boston: Harvard Business School Publishing.

Stefano, N., & Filho, N. (2013). Activity-based costing in services: literature bibliometric review. Springer Plus, 2, 80.

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