How to create an activity based costing model
As part of the senior leadership team, you should know the cost drivers and the levers that can be leveraged for your business to be profitable. Activity-based costing is a cost accounting method that allows you to see how much it costs for a product or a service. If used correctly, activity-based costing can be a very powerful tool for businesses looking to improve their profits. Let’s look at an interesting example of how activity-based costing helped a digital media company improve their profitability by over 10%.
The company was in the business of providing OTT services of live and on-demand video content to a global subscriber base. The company’s revenue was growing at over 50% Y-o-Y but their profit numbers were not demonstrating a similar trend. By deploying advanced spend analytics, the client was able to get full visibility of third-party cost components that under pinned their subscription services. On top of this data, the company analysed the costs of people and processes to support its subscription services. These steps enabled the management to understand the “as-is” activity-based costing for providing the subscription services to their consumers. Subsequent deep dive into their third-party supplier contracts (to understand the commercial arrangements)identified improvement opportunities to these contracts and commercial arrangements with the key suppliers. This resulted in reducing their cost of delivering subscription services by 10%; in short without increasing the monthly subscription fees the company was able to get more profits from their subscriber base. The added benefit the business derived was better service from their CDN providers thereby improving customer experience that resulted in improved loyalty and customer retention ratio.
If you would like to discover how Spendkey can fast track your journey to understand the activity-based cost for your key processes or business areas, book a demo by clicking on the link here.