The objective of this paper is to undertake a costing of a product which is yet to be introduced in the market. The service is a robotic taxi which offers customers with the opportunity to drive them without drivers from different point of Abu Dhabi to their destination. In other words, the passenger is the driver and hence the cost they incur to use the service is reduced.
In order to conduct this costing, the Activity Based Costing method was applied. The decision to use this model was based on the fact that it is more effective and descriptive because the overhead cost is distributed to the cost of the service categories.
It was determined that there are four main activities that include Self-Service Taxis, Taxis with a Driver, AbuRobo Application Operations, and Goods Delivery. Having distributed and allocated the cost to overhead cost such as salary, rent and maintenance among others, it was clear that ABC can be used to effectively determine a pricing strategy with a view to ensure profitability.
Introduction and Product Identification
Essentially, determining the cost of operations in business is one of the most crucial undertakings that affect its solvency (Holmes & McDermid, 2012). If the cost is calculated in the wrong way such that the results obtained are inaccurate, it is evident that the business might incur losses. As such, it follows that the process of costing must be thoroughly thought and conducted using an appropriate methodology to warrant the needed effect. Now, one of these methods used to calculate the cost associated with a product is Activity Based Accounting. This paper seeks to discuss the method in detail and then proceed to apply it to a product. In particular, it will be applied to a product that has not already been started. In other words, the product is in anticipation of introduction specifically in Abu Dhabi.
In particular, the paper proposes to introduce an innovative taxi service which will be self serviced. In the traditional taxi setting, the providers are used to driving people to their destination. This implies that the service provider has to employ driver in order carry out this undertaking and get the customers to their destinations. However, this method of providing the services is tedious and highly costly. The paper proposes that a new taxi service with a different business model be introduced. The company will be named AbuRobo Taxi to reflect both the city and the type of technology which are Abu Dhabi and Robot respectively.
Operations of AbuRobo
Since this will be a different and innovative business model for the transport industry, the operation will follow a different process altogether. First, instead of having the company drivers, the passengers will drive the taxis themselves. As such, the company will make an AbuRobo Application which will be operated using the customer’s mobile device. In order to install the AbuRobo application, the customer must first appear at the company’s offices to register with the company services. This will provide an opportunity for the company to evaluate the driving license of the customer to make sure that the client is validly allowed to drive in Abu Dhabi. With this identification, the customer will be provided with the application, username, and password for authentication purposes to access the registered account. Second, every time when the customer needs to use the taxi, s/he requires accessing his or her account in order to determine whether there are any available vehicles. If a taxi is available, the customer will access it at one of the AbuRobo designated parking areas in town. This location will be provided in the application with directions on how to get there. Third, the customer will enter the details of the vehicles and pay for the services to open the door of the taxi. The door cannot open before the customer authenticates his or her details in the application, provides the correct number plates, and paid for the services online. Fourth, the customer will drive to the destination and then park the vehicle back to the nearest AbuRobo parking area. In this case, it must be noted that the taxi will not drive past the designated jurisdiction within which it must operate. However, the customer will have the access to this information beforehand using the application searching button. Nonetheless, the company will offer the traditional taxi driving services in case the client requires that one. The client in this case will have to request for a driver beforehand using the application communication centre or a direct call.
Identification of the Method Used to Calculate Cost (Activity Based Costing)
In order to calculate the cost of the company’s operation, Activity Based Costing will be applied to AbuRobo Taxi. This evokes a very crucial question as to what Activity-Based Costing (ABC) represents. In essence, this is a method which mainly seeks to identify the costs that are incurred indirectly and then proceed to distribute it to the product produced at the final end (Rosati, 2012). The distribution is conducted in such a way that it is carried by the factors that lead to it. In other words, the indirect cost is distributed to the causative agents of the cost. This methodology of calculating the cost becomes very important because of two reasons. First, the method provides an opportunity for the company to review and control the overhead cost in a manner that allows profitability of the entire business venture. Secondly, the evaluation of cost using ABC enables the company’s managers to reconstruct the service in order to improve how it is marketed to potential customers in the target population. Now, this method of costing has five different steps. These steps will be applied to the service procedurally with a view to estimate the cost associated with the service provision. The application and calculations are as shown in the next paragraph going forward.
Application of the Activity Based Costing to AbuRobo Taxis
First Step: Identification and Choice of Main Activities that Make the Service
In the first stage of ABC method, it is required to identify the main activities that warrant the cost incurred based on the fact that Marshall, Mcmanus and Viele (2011) acknowledge that there are multiple undertakings that drive cost. As such, these are the fundamental engagement and undertakings that lead to the use of resources. These requirements, of course, may be in form of human, natural, and other artificial resources. In the AbuRobo Taxi service, the main activities involved include the following.
- Self-Drive Service- This is a scenario in which the customer drive himself or herself using the AbuRobo Taxi. In this case, the company does not incur driver’s salary cost because the client drives the taxi personally.
- Taxi Service with a Driver- In this company’s activity, the client requests the company o provide a driver and the taxi. The client is, therefore, driven to the destination and then parks the taxi back to the designated lot in town.
- Delivery of Goods – In this service, the company is contacted by a client to deliver a package, document, or a luggage. The client requires specifying where the luggage will be picked and the destination.
- AbuRobo Application Operations – This activity is involved in making sure that the application operates without hitches and effectively for the purpose of maintaining customer satisfaction.
Second Step: Conduct Allocation of Overhead Costs to the Main Activities Identified in the Previous Step
In this step, the costs associated with the main activities identified above are all calculated and provided against each of the activities. These overhead costs are obtained by pooling the resources required to successfully conduct the activity (Lanen, Anderson, & Maher, 2011). The pooled cost items include salaries, space renting, phone communication, advertisement, and maintenance of systems. Therefore, these are the overhead costs for which the cost will be allocated and distributed. Salaries will be paid to drivers, customer care officials, advertisers and others. Telephone plays a fundamental role in communication and coordination in the company operations. Space renting goes to the acquisition of office and advertisement helps to promote the service as well as brand creation.
Table 1: Allocation of overhead costs as estimated for AbuRobo
| || |
|Taxi Service with a Driver||278,150.00|
|Delivery of Goods||114,500.00|
|AbuRobo Application Operations||94,120.00|
|Total Cost Incurred||721,500.00|
Having identified these activities and allocated overhead costs to them, this distribution forms the basis of determining the cost rates. Before doing so, the next step seeks to identify the cost drivers that steer the build-up of cost.
Third Step: Establish the Drivers of Cost in Every Activity
Table 2: A table showing the cost drivers based on frequency
| || |
|Taxi Service with a Driver||4500|
|Delivery of Goods||1700|
|AbuRobo Application Operations(Most of the other three would use the mobile application hence the high number )||9000|
The table shows the number of activities conducted in every undertaking. This frequency becomes the factor for which the cost is attributed. Since the number of activities under each category has been identified, the next step can be accomplished with a view to obtain the predetermined rate of the overhead cost.
Fourth Step: Obtain Predetermined Rates of Overhead Cost
|Main Undertaking||Approximate Overhead Cost||Approximate Number of CostDrive Activity||Pre-calculated Rate of Overhead Cost|
|Taxi Service with a Driver||278150||4500||61.81|
|Delivery of Goods||114500||1700||67.35|
|AbuRobo Application Operations||94120||9000||10.45|
Fifth Step: Allocation of Overhead Costs to the Services of AbuRobo Taxi
|Cost||Self-Drive Service||Taxi Service with a Driver||Delivery of Goods||AbuRobo Application Operations||Total|
|Total Indirect Cost||234730||278150||114500||94120||721500|
Essentially, there would be a question why rent and advertisement have been distributed across all the activities yet it seems to only cater for the office or parking lot. In this case, the company will have different categories of parking for each type of services. In other words, there are different parking lots for the cars that deliver goods, the ones that provide self-drive, and the ones where a driver is provided by the company. In regard to the rest concerning the application operations, the office provides the location for support services and maintenance. As such, the cost of rent was distributed across all the activities. Now, when it comes to the distribution of advertisement cost it was also distributed across all activities because the company will launch these products progressively. Since this is a start-up, the company cannot start off with everything at once. The services will be introduced one after another. As such, different advertisements will be done every time when a new service is launched by the company.
Having established the indirect cost of the different services, it now becomes crucial to calculate the total cost of service. This is based on the fact that the cost of services incorporates both direct and indirect costs.
|Cost||Self-Drive Service||Taxi Service with a Driver||Delivery of Goods||AbuRobo Application Operations||Total|
|Direct Cost||Cost of 15 units of vehicles||Cost of 15 units of vehicles||Cost of 5 units of vehicles||Cost of Software development|
The direct costs for self-drive, taxis with driver, and good delivery will be incurred due to the purchase of vehicles. Each vehicle will be purchased from Japan at a cost of US $8168 which amount to about 30,000 AED. As such, the self-drive, taxi with a driver, and good delivery will have 15, 10, and 5 saloon cars respectively.
Benefits and Limitations of Activity Based Costing
Essentially, ABC has various benefits as well as limitations that accompany its use in calculating the cost. Importantly, the method is seen to estimate the cost in a more accurate manner than the common traditional model. In addition to this, it is very appropriate in helping managers and senior company officials to make decisions. These decisions include pricing strategies and sharpening the features of the product to increase customer satisfaction. Further, the method offers an opportunity to build up the knowledge and skills used in undertaking various processes. Lastly, it enables the managers to fast track the performance of each service in relation to the overhead cost. This is an indication that the method is a very critical solution to most of the challenges incurred by businesses and its mangers as far as costing is concerned.
Whereas it is of significant benefits, it also has limitations that come with its application. Essentially, it requires more effort to be put in order to obtain correct and enough information for analysis. This scenario leads to burdening of the accounting department. As such, the company may find itself directing more energy and human resources to a single department so that other areas are handicapped and ineffective. In addition to this, the complexity of ABC compels companies to use consultancy services such. These consultancy services end up lengthening the process of costing due to outsourcing factor. Consequently, the cost of preparing it rises because the company has to pay for the consultancy within the time it has been done.
Clearly, AbuRobo is an innovative idea to be introduced in Abu Dhabi with a view to transform the entire taxi industry. In this regard, it offers customer with the ability to drive taxis personally while still maintaining the other traditional forms of services for those who might be willing to use them. With this kind of a business, the Activity Based Model has been used effectively to conduct the costing of the business to be introduced. This costing has been conducted in five steps where it was determined that self-service taxis, taxis with a driver, delivery of goods, application operations are the main activities of the company. Having identified the main undertakings, the respective steps have calculated the unit rates of overhead costs and allocated the costs to the services. The company will use the results obtained in the process of pricing its services in order to make sure that it makes profits and remains solvent. In other words, the application of ABC, which is very accurate as compared to the traditional method of costing, will assist in various decision making processes.
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Marshall, D. H., Mcmanus, W. W., & Viele, D. F. (2011). Accounting: What the numbers mean. Boston: McGraw-Hill Irwin.
Rosati, K. (2012). The ABC of costing – fundamentals. Sydney: NSW Young Lawyers.