MEASURING AND MANAGING CUSTOMER PROFITABILITY

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MEASURING AND MANAGING CUSTOMER PROFITABILITY

Friday, September 27, 2019

4.4 (34)

Presenter :Gary Cokins, CMA, MBA

Company :Analytics-Based Performance Management LLC

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Course Details

Overview of Topics

Managerial Accounting – era and issues7 mins
What is Activity-based costing (ABC)?12 mins
Key issues faced while Implementing ABC28 mins
How one should calculate a channel and customer profitability?33 mins
What is analytics and how to apply it successfully?56 mins
Historical costing versus predictive costing59 mins
Which are major barriers that slow down the adoption rate of ABC?77 mins
Major excuses preventing being progressive80 mins

Course Description

Customers increasingly view suppliers’ products and standard service lines as commodities. This means that suppliers must shift their actions toward differentiating their services, offers, discounts, and deals to different types of existing customers to retain and grow them. As a result of this shift from being product-centric to customer centric, suppliers need an increased emphasis on measuring current and future potential profitability of products, standard service-lines, channels, and customers. Activity-based costing (ABC) provides the information lacking in traditional costing practices to address both issues – measuring customer and channel profitability including the costs of products and standard service lines.

Learning objectives

Why customers are the source of shareholder wealth creation.
How to shift the mindset from growing sales to growing profitable sales & to view customers as investments like in a stock portfolio to seek higher ROIs – return on customers (ROC)
Why the marketing and sales functions need accounting data to better formulate customer account strategies including compensation incentives.
How to measure and manage product, channel, and customer profitability
How measuring forward-looking customer lifetime value (CLV) differs from calculating historical customer / consumer profitability for B2C industries.

About Presenter

Gary Cokins, CMA, MBA

Advisor,Analytics-Based Performance Management LLC

gcokins@garycokins.com

Gary Cokins is an internationally recognized expert, speaker, and author in enterprise and corporate performance management improvement methods and business analytics. He is the founder of Analytics-Based Performance Management, an advisory firm located in Cary, North Carolina at www.garycokins.com . Gary received a BS degree with honors in Industrial Engineering/Operations Research from Cornell University in 1971. He received his MBA with honors from Northwestern University’s Kellogg School of Management in 1974.Gary began his career as a strategic planner with FMC’s Link-Belt Division and then served as Financial Controller and Operations Manager. In 1981 Gary began his management consulting career first with Deloitte consulting, and then in 1988 with KPMG consulting. In 1992 Gary headed the National Cost Management Consulting Services for Electronic Data Systems (EDS) now part of HP. From 1997 until 2013 Gary was a Principal Consultant with SAS, a leading provider of business analytics software.

Analytics-Based Performance Management LLC

www.analyticsperfmgmt.com

Analytics-Based Performance Management LLC. provides advisory services to organizations, consulting firms, and software vendors with their challenges to get started, implement, and leverage enterprise and corporate performance management (EPM / CPM) methods such as customer profitability analysis (using ABC), analytics, rolling financial forecasts, strategy maps, and balanced scorecards (KPIs).

Review Questions

Question 1 : 00:17
Question 2 : 00:35
Question 3 : 00:50
Question 4 : 01:15
Question 5 : 01:30

Review Questions
Final Quiz

What has primarily caused indirect expenses (overhead) to displace direct expenses?
- Automation direct work
  Replacing direct work with automation may modestly reduce direct expenses but increased diversity is the primary cause.
- Increased diversity causes complexity which requires more indirect expenses to manage the complexity.
  Increased diversity causes complexity which requires more indirect expenses to manage the complexity
- Direct workers more efficiently speed up when rewarded with cash bonuses to be more productive.
  Increased work efficiencies are relatively minor.
- As companies become bureaucratic they hire and add more overhead employees.
  Hiring more employees must be justified based on an increased workload.
Why are using spreadsheets not applicable for calculating activity-based costing (ABC)?
- Spreadsheets have a limited maximum capacity of data.
  Spreadsheets can handle a substantial amount of data.
- Spreadsheets can only be processed on a stand-alone personal computer.
  It is irrelevant what computing hardware is used for ABC.
- Spreadsheets restrict flexible cost flowing and do not provide upstream and downstream visibility of the cost flows.
  Spreadsheets are restricted to columns-to-rows whereas the ABC cost assignment process is a network with costs flowing at different levels.
- Spreadsheets cannot extract general ledger account data and transactional data from production systems.
  Spreadsheets can do this with cumbersome programming, but commercial ABC software is designed to do this.
What is the most significant determinant that influences the accuracy of calculated costs?
- Having transactional quantities of activity driver amount to trace to final cost objects
  With cost flowing all costs normalize to 100% or else the final output costs will not reconcile exactly with the input expenses from the general ledger. Hence estimated percentages can be used except for the vital few that are material with relatively higher amounts.
- The multi-stage cost assignment network
  The cost assignment network facilitates which nodes in the network go to or do not go to cost objects.
- Having employees’ complete daily time-sheets for how much time they spend on each work activity.
  Cost assignments tolerate some imprecision with calculating the activity costs because some that may be over-coasted by others that are under-coasted and the error offsets when they are re-assigned to final cost objects. There is an error-dampening property with the cost assignment network.
- Having supervisors monitor and audit the input data provided by their subordinate employees to assess if they are reliable or flawed.
  Policing employees introduces fear with an organization where the purpose of the costing is to provide information relevant for gaining insights and making better decisions.
What is a significant reason why non-product and non-standard service-line costs to serve for individual customers are now so critical to measure?
- The Board of Directors may ask this question.
  The purpose of board members is governance and not tactical operational decisions of managers
- The C-suite executives may be interested in comparing the \\\\\\\\\\\\\\\\
  Their knowing the amounts is irrelevant without a context for managing the customers to higher levels of profitability.
- Customers increasingly view suppliers as offering commodity-like products and standard service lines
  Suppliers must provide differentiated services to different types of customer micro-segments, and they range from high- to low-demanding causing different levels of workload for the supplier.
- There is a concern that the government regulatory agencies may require this for GAAP reporting to investors.
  Internal management accounting for decision support is different from external financial reporting for statutory compliance.
What is a condition where ABC is less applicable as a management accounting method?
- When the CFO and the executive team only care about external financial accounting statutory and compliance reporting to government regulatory agencies.
  Executives also care about management information to operate their business.
- When products are very unique to a customer and business processes are less repetitive.
  For engineer- or make-to-order products or one-of-a-kind outputs (e.g., a satellite, a building) project accounting is a higher form of direct costing.
- When managers are fearful of other colleagues knowing the truth about their products or standard service-lines cost.
  That condition would only apply if a manager is self-serving with no interest in the financial performance of their company as a whole.
- When a company cannot afford ABC software.
  Commercial ABC software is provided by several vendors with pricing levels that meet the budget of even small companies.

Minimum 70% Questions answer should be right.

Which one of these does not describe ABC?
- Traces expenses into costs consumed by products and customers.
- Calculates expense consumption based on costing’s “causality principle”
- Requires key performance indicators (KPIs)
- Can report different cost amounts than used for GAAP reporting
What type of expenses is increasingly the most important to calculate costs to increase profits?
- Product-related.
- Information technology.
- Non-product customer “costs to serve”.
- Environmental sustainability.
Which is the most superior and comprehensive cost accounting method?
- Calculates only direct material and labor product costs without overhead cost allocations
- Calculates product costs with a single (or very few) overhead cost allocation factors without causal relationships
- Calculates product costs with multiple overhead cost pools using ABC principles with causality
- Calculates product, channel, and customer costs using ABC principles producing individual customer P&L reports
What most explains why the largest B2B customers in sales volume are not the most profitable?
- The customers are international ones.
- The customers are high maintenance and demanding.
- The customers negotiate for low prices.
- The customers are privately held ownership.
How can a supplier destroy shareholder and owner wealth?
- By mistreating its customers.
- By ignoring its customers phone calls.
- By unnecessary over-serving loyal customers or under-serving marginally loyal customers.
- By excessively paying its executives salaries.
Customer lifetime value (CLV) measurements apply when which one condition exists?
- The customer is a company in a supply chain
- The customer is a consumer who will pass through life phases
- Customers can be segmented by their home residence location
- Only female customers
What is an essential requirement for reliable predictive accounting ?
- A crystal ball.
- Spreadsheet software
- Accountants with CPAs.
- Unit-level cost consumption rates.
Which stage in the ROI on information chart is the highest stage?
- Which stage in the ROI on the information chart is the highest stage?
- Data mining query and drill down (OLAP)
- Prescriptive analytics modeling (optimization tools)
- Predictive modeling

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Reviews

4.4

(34)

62%

21%

12%

HF

Harrold Flemins , CPA

Aug 16th 2019

A+ presenatation, very valuable, I would recommend to anyone

Daniel Guetzkow , CPA

Aug 14th, 2019

Minor problems. At the end, we could still see the presenter's screen while he was catching up on email. Your contract with speakers might wish to address any legal liabilities you incur when such anomalies happen.

Kevin Hatfield , CPA

Aug 19th, 2019

thank you.

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Cost $9
CPE Credits 1.5
Subject Area Accounting
Course Level Basic
Instructional Method QAS Self Study
Prerequisites None
Advanced Preparation None
Recorded Date September 27 ,2019
Published Date September 27 ,2019
Who should attend? Finance Pros Bookkeeper Accountant Xero Advisor QB Pro Advisor CPA - Small Firm Accounting Firm Young CPA Entrepreneurial CPA
Handout Material Download
Key Terms Download

On-Demand Webinars

Move up a Grade: Revision Guide

Monday, May 18, 2020 View Details/Register

Knowledge Performance Indicators (KPIs) for SMEs

Wednesday, May 13, 2020 View Details/Register

Business Performance Management

Wednesday, May 13, 2020 View Details/Register

The Theory of Constrainst and Lean Accounting

Tuesday, May 12, 2020 View Details/Register

THE MATHEMATICS OF ESTATE PLANNING FOR IRAS AFTER THE SECURE ACT

Friday, May 08, 2020 View Details/Register

The Accountant's Guide to Climate Change

Friday, May 08, 2020 View Details/Register

Professional Ethics for Accountants

Thursday, May 07, 2020 View Details/Register

Nebraska Ethics Principles and Conduct for CPAs

Friday, April 17, 2020 View Details/Register

MONTANA Ethics Principles and Conduct

Friday, April 17, 2020 View Details/Register

Massachusetts Ethics Principles and Conduct

Friday, April 17, 2020 View Details/Register

Maryland Ethics Principles and Conduct

Friday, April 17, 2020 View Details/Register

Executive Overview of Revenue Recognition (Topic 606) Exploring Both the Accounting & Tax

Wednesday, May 06, 2020 View Details/Register

Principles of Financial Statement Presentation

Wednesday, May 06, 2020 View Details/Register

Data Analysis 101 - Getting to the heart of performance data

Monday, May 04, 2020 View Details/Register