Activity-Based Costing (ABC) in Service Industries – NIKE

Activity-Based Costing (ABC) in Service Industries Assignment Instructions

Research a U.S. company in the service industry with e-commerce activities. Write a five page paper in which you:

  1. Describe the company you researched in one to two (1-2) paragraphs.
  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.
  3. Assess how using an ABC system can provide a competitive advantage to the company in the market space it operates and the resulting impact to the business performance.
  4. Examine the potential impact of time-driven ABC costing on services provided online with those provided through traditional channels, considering how this knowledge will impact decisions made by management about these services.
  5. Use at least three (3) quality academic resources in this assignment. Note: Wikipedia and other Websites do not quality as academic resources.

The specific course learning outcomes associated with this assignment are:

  • Analyze the concepts of job order costing, process costing, and activity-based costing.
  • Use technology and information resources to research issues in managerial accounting.
  • Write clearly and concisely about managerial accounting using proper writing mechanics.

Activity-Based Costing in NIKE – Sample Paper

This paper discusses how a time driven Activity-Based Costing cost system can be implemented in Nike and the benefits that it can yield to business performance. Nike is an American-based multinational corporation that engages in designing, developing, manufacture as well as global marketing and sales of accessories, equipment, apparel, footwear, and services. It started its operations in 1964 originally known as blue ribbon sports where it worked in collaboration with the Japanese shoemaker Onitsuka Tiger (Nike Inc., n.d). It was not until 1971 that the company officially assumed its current brand name; Nike Inc.  Even though most of the products are used or worn casually or leisurely, the athletic footwear products designed by the company are principally for particular athletic use. Its main focus is on Brand Jordan and Nike Brand product offerings that are availed in seven main categories: football, basketball, running, women’s training, men’s training, actions sports, and NIKE sportswear.

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It markets a large range of products including those ones designed for kids. It, also, markets other products designed for recreational and athletic uses such as lacrosse, golf, cricket, baseball, volleyball, tennis, football, outdoor activities, wrestling and walking. There is another line of performance equipment, which the company sells under the NIKE Brand name and these include eyewear, sports balls, socks, bags, protective equipment, gloves, bats, digital devices, golf clubs, timepieces, and other sports activity equipment (Nike Inc., n.d). The company has operating segments in various parts of the world including Western Europe, North America, Greater China, Central & Eastern Europe, Emerging markets and Japan. Wholly-owned subsidiaries that operate under Nike Inc. include Hurley International LLC and Converse Inc. The company’s headquarters are in Beaverton, OR.

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It is essential to note that Activity-Based Costing (ABC) is a strategy of costing, which a business can use to assign resources costs to objects of cost like customers, services and products based on activities undertaken for cost objects (Zeuner, 2013). This costing approach is premised on the idea that the services or products of the firm result from its activities, which require resources that have costs. Nike Inc. being a multi-facility company, it can implement a time driven activity-based costing system by building the model at a single site; for in instance, Beaverton, which is its headquarters. Since the company has manufacturing and distribution centers in various parts of the world such as Western Europe, North America, Greater China, Central & Eastern Europe, Emerging markets and Japan, the model structure built at the headquarters can serve as a template for all these other subsidiaries. This is because the definition of processes and departments as well as the time equations will be similar.

Read also Allocating Fixed Costs Using Activity Based Costing

In order to successfully implement a time driven model at Nike Inc., the management should first conduct estimation of the cost per time unit of the capacity (Zeuner, 2013). Managers should not concentrate on surveying employees in respect to the way they spend their time; instead, they should conduct direct estimation of the practical capacity of the supplied resources and consider it as a percentage of the hypothetical capacity. This cost per time unit of capacity is considered in terms of employees and machines. In most cases, managers should assign a lower rate of about 80 percent to employees, considering that 20 percent of their time is consumed during arrival and departure, breaks, training and communication. In regard to machines, managers can assign a 15 percent differential between practical and theoretical capacity in order to allow for down time following scheduling fluctuations, repair and maintenance. A preferably systematic approach would be reviewing the company’s past levels of activity and identify a month in which the largest number of orders were handled without tendencies of poor quality, stressed employees, overtime, or excessive delays.

Read also Job , Process And Activity based Costing System

The next implementation stage entails estimation of the unit times of activities (Kaplan & Anderson, 2013). In this case, the Nike Inc. managers should determine the length of time taken to perform one unit of every kind of activity in the company. In this case the question is the length of time taken to complete one unit of each activity; for instance, the length of time taken to process one particular order. In a large organization such as Nike Inc., such data can be obtained through interviews and surveys. The next phase of implementation entails derivation of cost-driver rates (Kaplan & Anderson, 2013). Once these standard rates have been obtained, they can be applied in real time to allot costs to individual customers while transactions occur.

There are a number of benefits that a time-driven Activity-Based Costing can yield to the business performance at Nike Inc. First benefit is that it reduces the number of activities that the company requires maintaining. Besides, it easily updates each department’s and cost center’s resource cost so that the process costs can be accurate and current (Kaplan & Anderson, 2013). Secondly, it increases the accuracy of cost estimates due to reliance on actual observations of actual transaction data and processing time. Thirdly, a time driven ABC model is an easier model for Nike Inc. to validate. The fourth benefit is that the model can provide unequivocal information on processes that are operating at capacity or even beyond as well those processes operating below capacity. In this regard, it is easier for managers to act so that they can prevent bottlenecks that could persist in the future.

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In terms of competitive advantage in production and sales of sporting equipment, an ABC system is advantageous to Nike Inc. in a number of ways. Appropriate application of the system can provide a much better and accurate portrayal as compared to the various accounting approaches that were used previously. A better understanding of cost can enable management in making better decisions that can enable the company maintain its competitive advantage. Besides, improved localization and understanding of costs can assist in the elimination of low value high cost activities (Kaplan & Anderson, 2013). An ABC system can provide competitive advantage to Nike Inc. through cost information credibility. This is valuable cost information, which attributes reliability, relevance, accuracy, timeliness, accessible, thoroughness and up-to-datedness for purposes of decision making. This can enable managers identify opportunities as well as potential problems so that they can make more effective and well informed decisions. Through cost reporting usefulness, an ABC system can increase the competitive advantage of Nike Inc. through utilization of cost information controlling, planning, and decision-making to enhance job performance. An ABC system can, also, enhance the competitive advantage of Nike Inc. through cost driver fitness. Cost driver fitness is essential for analyzing the indirect costs so that managers can identify the kinds of activities that cause such costs. This provides information that can lead to separation of non-value added and value added activities.

Regarding the potential impact of time-driven ABC costing on services provided online with those provided through traditional channels, it is worth noting that time-driven ABC costing is more effective than the traditional ABC channels. Through cost calculation accuracy, time-driven activity-based costing can impact on services provided online through enhancing the capacity of the company to allot indirect costs of services based on multiple cost drivers and activities performed. In this regard, it is easier for company managers to update the time-driven ABC model so that the changes experienced within the operating conditions can be reflected (Kaplan & Anderson, 2013). Time-driven ABC model has the capacity to increase the online presence of Nike Inc. so that customers who visit the company through its website can easily place their orders via online channels. Since the time for order processing is reduced, customers will be able to receive responses to their orders within the shortest time possible.

In conclusion, this paper discussed how a time driven ABC cost system can be implemented in Nike and the benefits that it can yield to business performance. Nike is an American-based multinational corporation that engages in designing, developing, manufacture as well as global marketing and sales of accessories, equipment, apparel, footwear, and services. It is essential to note that Activity-Based Costing (ABC) is a strategy of costing, which a business can use to assign resources costs to objects of cost like customers, services and products based on activities undertaken for cost objects. There are a number of benefits that a time-driven Activity-Based Costing can yield to the business performance at Nike Inc. such as reducing the number of activities that the company requires maintaining. Through cost reporting usefulness, an ABC system can increase the competitive advantage of Nike Inc. through utilization of cost information controlling, planning, decision-making to enhance job performance.

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