Activity Based Costing, Customer Segmentation, and Budgeting Analysis

This assignment solution addresses a finance quiz focused on activity-based costing (ABC) within the context of a clothing company, Intermittant. The solution analyzes customer segments based on sales and needs, determining profitability using ABC. It ranks customer segments, recommending strategies to maximize profits, including focusing on high-profit segments and improving relationships with others. The solution also explains how ABC aids budgeting by utilizing historical data to forecast costs and variances. Furthermore, the solution highlights the benefits of implementing ABC, such as identifying true product profitability and costs, improving decision-making, and accurately allocating indirect costs. The document includes references to relevant academic resources.

Answer B
On the basis of analysis, it can be inferred that the highest profitability is for the customer segment
“High Sale / Low needs” consumer category. The profit for the said category stood at Euro 1064
which is highest among the 4 segments. Also, the lowest profitability/ loss has been observed in the
segment “High Sale / High needs” consumer segment. The profit for the said category stood at Euro -
337 which is lowest among the 4 segments. The above derivation has been based on Activity based
Costing, a modern form of costing whereby the true indirect cost is matched to the product and
helps in ascertain the true profitability of a product.
Answer C
On the basis of above analysis the ranking of the customer has been presented as under:
(A) “High Sale / Low needs” : Rank 1
(B) “Low Sale / Low needs” : Rank 2
(C) “Low Sale / High needs”: Rank 3
(D) “High Sale / High needs”: Rank 4
Thus, the company shall first focus on the major profit generating customer segment and should try
to expand the business of the same. Post, that company should focus on other segments and try to
develop the same to enhance the overall profitability of the business. Also, special attention needs
to be paid to the loss making segment of the business and try to make it profitable in the short run
by developing good relation. If the said event is not possible in the near horizon company should
drop this segment and profit on other segments of the business to make them profitable.
The company has been spending Euro 100 for management of relationship, they may increase the
same as the said cost is not high to procure new clientele for the company.
Answer D
When company is implanting Activity Based Costing and preparing budget based on the same, the
data is used for past years which have been experienced by the company in the past years and the
said driver becomes the budgeted data for the current year. Thus, the company while prepare
budget on the basis of activity based costing rely on budgeted data which is not but actual data of
past years. Further, at the end of the year the variance is calculated both at the cost driver level and
the expenditure level to estimate the true variance of the product.
For instance suppose the cost driver like machine hours Is estimated at 100 hours based on past data
and the expenditure is estimated at 100 AUD, the allocation shall be based on the same. However, if
at the end of the year of the results are different then there shall be adjustment entry for variances.
(Using Activity-Based Costing to Allocate Overhead Costs, 2019)
Answer E
Implementation of Activity Based Accounting aid the budgeting process in the following manner:
(a) Identification of true profitability of a product;
(b) Identification of true cost of a product;
(c) Helps in better decision making by focussing on the mist profitable segment of the business;
(d) Accurate method for identifying and allocating the indirect cost of production to different
product and segment of the business.

(e) Helps in making visible non value adding and loss making product and segments of the
company;
(f) Better understanding of overheads and cost drivers which helps in better understanding of the
budget.
(g) Better management of indirect cost of production and elimination of unnecessary overheads.
(h) Aids in improving product profitability.
References
Using Activity-Based Costing to Allocate Overhead Costs. (2019, May 25). Retrieved from
saylordotorg.github.io: https://saylordotorg.github.io/text_managerial-accounting/s07-03-
using-activity-based-costing-t.html