Summary by Christina Thayer
Master of Accountancy Program
University of South Florida, Fall 2004
The author had several purposes in mind. Zeller first wanted to discuss how an e-retail company differed from a traditional retail store in terms of reaching customers and measuring profit, and introduce a customer driven business model as a means to attaining success in the e-commerce environment. He then identified fourteen retail activities, and examined in detail the four that are unique to e-commerce and their related cost drivers. Finally, Zeller discussed how ABC can be utilized for daily decisions and to also support long term growth for an e-retail business. To protect the identity of the company where he completed his fieldwork, Zeller used a fictitious Golf accessory e-retail store to present his finding and illustrate his examples in the article.
Challenges Facing an E-Retailing Business
An e-retail business comes with many challenges that a traditional retail business does not have to face. One challenge is that, in its initial stages of development, it is difficult to know which infrastructures and support systems must be in place in order to make the e-retail business profitable in the long run. Much trial and error is involved in perfecting this area. Also, the internet landscape is dynamic and always shifting. Thus it is a challenge to identify the most effective way to advertise and promote a product in order to draw in customers. Continuing with this theory, an e-retailer must be aware that selling is limited to what the customer sees on the screen, not what they are able to touch or smell. Taking this into account, the product must be effectively presented to the consumer in order to encourage sales. If the e-retailer can overcome these challenges, he/she stands to create brand recognition for their products and create real wealth, as opposed to anticipated earnings.
The Customer-Focused Business Model
Zeller stressed that the development of a strict customer-focused business model is critical for the e-retailer in attaining success. A traditional economic business model is characterized by maximizing shareholder wealth and individuals being motivated by economic goals. The consumer is not an integral part of the model. A customer-focused business model recognizes the consumer as the central component. Working relationships across company departments in order to identify what the consumer wants is imperative.
E-Commerce Cost-Objects and Unique Activities
Zeller identified fourteen different activities for e-commerce retail activities, four of them being unique to the e-commerce retail business. In this study, the product category is the cost object. The cost-object categories are:
Golf Club Components
Custom-Built Golf Club Components
Unused Activity Resources
The unique activities are as follows:
Activity 2 is electronic customer order processing, and the cost driver for this activity is time, in the form of hardware/software depreciation.
Activity 5 is imaging and annotation, and the cost driver is the number of changes to the inventory database.
Activity 7 is virtual storefront optimization, and the cost driver is the number of affiliate links.
Activity 9 is Customer Acquisition and retention/revenue share marketing, and the cost driver is the number of affiliate links.
Although the other ten activities are also common to traditional retail businesses, it should be noted that some of these activities will take on different roles in an e-retail business.
ABC and the E-Retail Business
In the final section of the article, Zeller discusses how the ABC system is used to assign costs and measure important cost information for managers to use in evaluating profitability. Using an ERP information system, a cost is assigned to each activity when the economic event is recorded into the accounting records. Zeller encourages the use of direct cost assignments, citing three advantages. One advantage is that department managers use the ABC numbers because they participated in accumulating the costs. Also, the accounting staff learns more about the resources necessary to operate different activities. Finally, using direct costs encourages communication across departments, which is conducive to identifying and serving consumer needs. Management can utilize the cost information captured to determine which activities to invest in and how much. Three main areas that Zeller identified that can benefit from ABC data include:
Balancing infrastructure resource allocation to activities
Estimating profit potential
Evaluating the cost of adding products or new market expansion.
Zeller stresses ABC’s pivotal role in the e-retail business.
In this article, Zeller wanted to introduce the reader to the unique nature of the e-retail industry. He examined the challenges faced by the industry and identifies specific activities that pertain to e-retailing. Zeller discussed how ABC is used to capture cost data, and identified ways in which e-retail managers can utilize this information to recognize areas of waste and potential profit.
Anderson, S. 1995. A framework for assessing cost management system changes: The case of activity based costing implementation at General Motors, 1986-1993. Journal of Management Accounting Research (7): 1-51. (Summary).
Anderson, S. W., J. W. Hesford and S. M. Young. 2002. Factors influencing the performance of activity based costing teams: A field study of ABC model development time in the automobile industry. Accounting, Organizations and Society 27(3): 195-211. (Summary).
Cooper, R. 1990. Implementing an activity-based cost system. Journal of Cost Management (Spring): 33-42. (Summary).
Cooper, R. and R. S. Kaplan. 1992. Activity-based systems: Measuring the costs of resource usage. Accounting Horizons (September): 1-13. (Summary).
Cooper, R. and R. Slagmulder. 2003. Interorganizational costing, Part 1. Cost Management (September/October): 14-21. (Summary).
Gordon, L. A. and M. P. Loeb. 2001. Distinguishing between direct and indirect costs is crucial for internet companies. Management Accounting Quarterly (Summer): 12-17. (Summary).
Gosselin, M. 1997. The effect of strategy and organizational structure on the adoption and implementation of activity-based costing. Accounting, Organizations and Society 22(2): 105-122. (Summary).
Jones, T. C. and D. Dugdale. 2002. The ABC bandwagon and the juggernaut of modernity. Accounting, Organizations and Society 27(1-2): 121-163. (Summary).
Kaplan, R. S. 1990. The four stage model of cost systems design. Management Accounting (February): 22-26. (Summary).
Krumwiede, K. R. 1998. ABC: Why it's tried and how it succeeds. Management Accounting (April): 32-34, 36, 38. (Summary).
Mangan, T. N. 1995. Integrating an activity-based cost system. Journal of Cost Management (Winter): 5-13. (Summary).
Martin, J. R. Not dated. Chapter 7: Activity Based Product Costing. Management Accounting: Concepts, Techniques & Controversial Issues. Management And Accounting Web. http://maaw.info/Chapter7.htm
Mecimore, C. D. and A. T. Bell. 1995. Are we ready for fourth-generation ABC? Management Accounting (January): 22-26. (Summary).
Porter, M. E. 2001. Strategy and the internet. Harvard Business Review (March): 63-78. (Summary).