Activity-based costing (ABC) was developed as a practical solution for problems with the traditional volume-based costing. ABC is not a replacement for traditional general ledger accounting; it translates general ledger data into useful costing information based on activities performed. A firm has to perform certain activities to provide the products and services it sells, and those activities cost money. Under the ABC system, the cost of these activities is measured and assigned to products and services using the activity by appropriate cost drivers. In recent years, small businesses are using ABC as a powerful management tool to aid managers in improving their decision-making capability. Two useful ABC articles in August 1999 issue of The Journal of Accountancy are provided with their websites below.

Learning to Love ABC: http://www.aicpa.org/pubs/jofa/aug1999/cokins.htm
Yes, ABC Is for Small Business, Too: http://www.aicpa.org/pubs/jofa/aug1999/hicks.htm

Required: Review these two articles and answer the following questions:

1. Why does the traditional volume-based costing approach usually fail to allocate costs to products or services correctly?
2. Why is it important to know the true cost of a process, product or service?
3. What are value chain activities, i.e., product-related operating activities of a small automobile components company mentioned in the second article?
4. What are cost drivers for setup, forging press, machining, and material movement activities in a small automobile components company?
5. What are payoffs or benefits of implementing the ABC system in a small automobile components company described in the second article?
6. According to the first article, what is the most likely reason that an ABC project fails?

Activity-based management (ABM) is a useful management tool in measuring customer value. Customer relationship management can help a firm to attract new customers and to retain, up sell, or cross sell to existing customers. But not all revenue is good revenue, and not all customers are good customers! Firms need to identify profitable customers. ABM can be helpful in laying the foundation for quantifying customer lifetime value metrics and integrating the results into customer relationship management. Two useful ABM and Customer Value articles in March and April 2001 issues of Strategic Finance magazine and are accessible via the links listed below.

Part One: http://www.mamag.com/strategicfinance/2001/03f.htm
Part Two: http://www.mamag.com/strategicfinance/2001/04i.htm

Required: Review these two articles and answer the following questions.

1. What is "customer relationship management?"
2. What is "customer lifetime value?"
3. What are major uses of the ABM to enhance a firm's understanding of which customers are driving value to the firm?
4. Briefly describe four types of customers: champions, demanders, acquaintances, and losers. What is the firm's best strategy regarding each type of customers?
5. How can a firm use the ABM to educate its customers?
6. There are four groups of activities related to customer lifetime value, i.e., acquiring, providing, serving, and retaining activities. Give example activities for each of the above-mentioned four groups.