Activity Based Costing in Services Industry: A Conceptual Framework for Entrepreneurs

ABSTRACTServices marketing is a key operation in businesses' economic activities and is becoming more important in both developed and developing economies. Since the service industry is a strategic sector for gross domestic product, cost and pricing concepts must be investigated thoroughly. True cost and resource management are fundamental to successful services marketing operations in entrepreneurial activities. Therefore, costing has also been crucial for successful execution of service processes and profitability and sustainability. In the last several decades, many methods have been discussed about and applied to true costing and efficient use of resources. Traditional approaches have included full costing that focuses on units produced, while contemporary approaches include just-in-time (JIT), throughput costing, theory of constraints and activity based costing that focused more on value, waste reduction and activities. In this study, activity based costing (ABC) is investigated in services marketing context, and a conceptual framework of ABC is illustrated for entrepreneurs to use in the service marketing industry.Keywords: Activity Based Costing, Services Marketing, EntrepreneurshipINTRODUCTIONIn highly competitive environments, businesses struggle under cost pressure and profit margin squeezes. As a result of intense competition, businesses must effectively manage costs and competitively price their products and services. Therefore, cost measurement and cost management methods are becoming more important aspects of pricing and overall marketing decisions.Doing business can be defined as the art of getting most profit with scarce resources available. Companies may move in two possible directions: profit or cost. In international business, all prices are determined globally, and local or global competitors cannot set prices freely. Therefore, profit is limited because of pricing constraints. As a result, many businesses often prefer to focus on managing their costs more efficiently.Cost management is the process of managing all resources efficiently. It is a more complex and complete activity than costing products and services alone. Cost management not only involves determining costs, but also requires making decisions about the whole process, cost allocation, pricing, and resource management. An important issue in cost management is selecting the right costing tool for the industry, company, and product or service. Cost management methods can be classified as either traditional, focusing on volume and labor, or contemporary, focusing on efficient and suitable cost drivers.Traditional costing methods often fail to adequately deal with overhead costs. Most of these methods directly allocate overhead costs, often based on volume or direct labor, and do not relate them with activities. This approach leads to incorrect allocations and disrupted costs (Baines, 1992). Traditional cost methods also fail by emphasizing high volume activities; consequently, highly important but less volume-generating activities incur fewer costs.In contrast, contemporary costing methods focus more on value and value-adding activities than on batch sizes and product units. Contemporary methods appear to be in line with value that goes beyond price, whereas service options and delivery times become more important in service industries. In such situations, activity based approaches seem to be more useful than unit based methods. Just-in-time (JIT), activity based costing (ABC), theory of constraints, and target costing are contemporary costing methods that have gained recognition during the last several decades. These contemporary costing methods differ from traditional ones by emphasizing function and value, reducing miscalculations by better classifying activities, and reducing bottlenecks in production stages. ABC deserves special attention as it is based on classification and allocation of costs via cost drivers. …