Summary by James Cline
Master of Accountancy Program
University of South Florida, Summer 2002
ABC Main Page | Service Organizations Main Page
The United States Postal Service, USPS, is a public sector company that operates in a private sector market. The services it generates are similar to other companies such as Federal Express, UPS, and Mail Boxes Etc. Through the early 1990’s, the USPS accepted only cash and checks as means of payment while its competitors also accepted credit cards. Society was moving towards a cashless environment under the headings of convenience and value, while businesses wanted increased sales and guaranteed payment. These factors led the USPS to hire Coopers & Lybrand to conduct activity-based cost studies of its revenue collection processes and a market strategy study for a national credit card and debit card program.
C & L developed separate cost models for the cash, check, credit card, and debit card processes in terms of the activities that link together to make the processes. The activities were broken down into unit activities, batch activities, and product activities. Examples of unit activities are: accept cash, processing of checks by bank, and process credit card. Examples of batch activities are: closeout and supervisor review of work, consolidation and deposit of unit’s cash/checks, and reconcile daily credit card receipts. Examples of product activities are: maintenance charges for bank accounts, reconciling bank accounts, maintaining credit card equipment, and training. Once the activities were identified, a proper driver was used for each activity. Examples are: number of transactions, closeouts, deposits, accounts, checks, charge backs, and terminals.
From the activities and corresponding drivers the projected annual cost was determined for each of the four processes. This projected cost model was computed for years 1994 through 2000, and it showed a negative net benefit derived through 1997. However, the projected net benefit from 1998 forward showed that implementing a credit/debit card system would be well worth the investment.
Even though this was all good news, approval was not a sure thing. What was being recommended to the USPS Board of Governors was an aggressive two-year implementation that would have 50,000 terminals in over 33,000 post offices with trained employees and would cost 60 million dollars. During Michael J. Riley’s (CFO) presentation to the Board on this matter, he made sure to explain the financial benefits that would be derived, but made sure to push the fact that this was a customer service initiative. Any financial benefits gained would simply be an added bonus. The USPS Board of Governors unanimously approved the implementation of a credit/debit card program. Implementation started in April of 1995.
Pushed as a customer service initiative, the scope of this project was expanded to include phone and mail orders for stamps as well as vending machines for convenience. The contract was also revised to 67,000 terminals due to demand for the services.
The benefits derived from this project:
More than 300 positive news articles on this program.
Customers enjoy the convenience and flexibility.
USPS retail window clerks feel safer (less cash).
More accurate than counting cash, so liability is minimized.
USPS gets funds the next day from card transactions at a very competitive discount rate.
The payment infrastructure created by card acceptance has helped the USPS launch new products and market tests more quickly.
The USPS is the nation’s largest debit card acceptor due to its delay in credit card acceptance.
The uses for Activity Based Costing continues to grow. Its original purpose was to calculate accurate product costs. Here, we have seen it used to identify the strategic process improvements that maximize value to customers.
_____________________________________________________
Related summaries:
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).
Argyris, C. and R. S. Kaplan. 1994. Implementing new knowledge: The case of activity-based costing. Accounting Horizons (September): 83-105. (Summary).
Baxendale, S. J. and P. S. Raju. 2004. Using ABC to enhance throughput accounting: A strategic perspective. Cost Management (January/February): 31-38. (Summary).
Caltrider, J., D. Pattison and P. Richardson. 1995. Can cost control and quality care coexist? Management Accounting (August): 38-42. (Summary).
Cokins, G. 1999. Using ABC to become ABM. Journal of Cost Management (January/February): 29-35. (Summary).
Cokins, G. 2002. Integrating target costing and ABC. Journal of Cost Management (July/August): 13-22. (Summary).
Cooper, R. 1990. Implementing an activity-based cost system. Journal of Cost Management (Spring): 33-42. (Summary).
Cooper, R. 1996. Activity-based management and the lean enterprise. Journal of Cost Management (Winter): 6-14. (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. S. Kaplan. 1998. The promise - and peril - of integrated cost systems. Harvard Business Review (July-August): 109-119. (Summary 1, Summary 2).
Corbett, T. 2000. Throughput accounting and activity-based costing: The driving factors behind each methodology. Journal of Cost Management (January/February): 37-45. (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).
Hughes, S. B. and K. A. Paulson Gjerde. 2003. Do different cost systems make a difference? Management Accounting Quarterly (Fall): 22-30. (Summary).
Ittner, C. D., D. F. Larcker and T. Randall. 1997. The activity-based cost hierarchy, production policies and firm profitability. Journal of Management Accounting Research (9): 143-162. (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).
Kaplan, R. S. 1998. Innovation action research: Creating new management theory and practice. Journal of Management Accounting Research (10): 89-118. (Summary).
Kaplan, R. S. and M. E. Porter. 2011. How to solve the cost crisis in health care: The biggest problem with health care isn't with insurance or politics. It's that we're measuring the wrong things the wrong way. Harvard Business Review (September): 46-64. (Time-driven ABC applied to health care). (Summary).
Kaplan, R. S. and S. R. Anderson. 2004. Time-driven activity-based costing. Harvard Business Review (November): 131-138. (Summary).
Kaplan, R. S. and S. R. Anderson. 2007. The innovation of time-driven activity-based costing. Cost Management (March/April): 5-15. (Summary).
Kaplan, R. S., M. E. Porter and M. L. Frigo. 2017. Managing healthcare costs and value. Strategic Finance (January): 24-33. (Summary).
Kaplan, S. E. and J. T. Mackey. 1992. An examination of the association between organizational design factors and the use of accounting information for managerial performance evaluation. Journal of Management Accounting Research (4): 116-130. (Summary).
Kee, R. C. 2001. Implementing cost-volume-profit analysis using an activity-based costing system. Advances in Management Accounting (10): 77-94. (Summary).
Keys, D. E. 1994. Tracing costs in the three stages of activity-based management. Journal of Cost Management (Winter): 30-37. (Summary).
Keys, D. E. and R. J. Lefevre. 1995. Departmental activity-based management. Management Accounting (January): 27-30. (Summary).
Krumwiede, K. R. 1998. ABC: Why it's tried and how it succeeds. Management Accounting (April): 32-34, 36, 38. (Summary).
Landry, S. P., L. M. Wood and T. M. Lindquist. 1997. Can ABC bring mixed results? Management Accounting (March): 28-30, 32-33. (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. Chapter7.htm
Mecimore, C. D. and A. T. Bell. 1995. Are we ready for fourth-generation ABC? Management Accounting (January): 22-26. (Summary).
Palmer, R. J. and M. Vied. 1998. Could ABC threaten the survival of your company? Management Accounting (November): 33-36. (Summary).
Ruhl, J. M. and B. P. Hartman. 1998. Activity-Based Costing in the Service Sector. Advances in Management Accounting (6): 147-161. (Summary).
Rupp, A. W. 1995. ABC: A pilot approach. Management Accounting (January): 50-55. (Summary).
Sandison, D., S. C. Hansen and R. G. Torok. 2003. Activity-based planning and budgeting: A new approach. Journal of Cost Management (March/April): 16-22. (Summary).
Troxel, R. and M. Weber. 1990. The evolution of activity-based costing. Journal of Cost Management (Spring):14-22. (Summary).
Turney, P. B. B. 1990. Ten myths about implementing an activity-based costing system. Journal of Cost Management (Spring): 24-32. (Summary).
West, T. D. and D. A. West. 1997. Applying ABC to healthcare. Management Accounting (February): 22, 24-26, 28-30, 32-33. (Summary).
Zeller, T. L. 2000. Measuring and managing e-retailing with activity-based costing. Journal of Cost Management (January/February): 17-30. (Summary).