Activity-Based Costing (ABC) in Service Industry Finance Essay

Activity-Based Costing in Service Industry
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Activity-Based Costing in Service Industry
American Airlines is the world’s largest airline in terms of the number of passengers it services on a daily basis. The company has headquarters in Footworth, Texas within Dallas Metro complex. The airline works with partners to produce around 6,800 flights to 350 different destinations in 350 different countries daily. To add on that, the airline is also one of the founding members of the One World Alliance, this is the third largest airline alliance in the world. A study done by SkaiBlu showed that, the United States carrier is also digitally advanced in terms of e-commerce activities. The essay is a reflection of the impacts of Activity Based Costing system on the company’s overall performance.
The trend towards more and more markets that are commercially driven has made airline companies to liberalize most of the bilateral air service agreements and also the perennial monetary services in airline services has caused many airlines to evaluate their operational methods and the nature of the customer services they offer. There are two main stages of ABC. In the first stage, the cost of resources is assigned to various activities using cost drivers. Cost drivers are the factors that affect the resources consumed by various company activities. Each type of driver is traced to the activities it affects. In this case, a cost driver can be the fuel prices. The fluctuating prices have had a massive impact on the airline (American-flight.com, 2020). The second stage is where the activity costs are distributed using drivers that measure the consumption rate. For instance, the scale at which fuel prices impact the company profits can be measured. A widely perceived space of value savings is essential to transit and flight costs, however there are potential savings that can be made from improved operational processes and elimination of alternate efficiencies. Activity based costing systems provide ways to manage the price of services and enhance client experiences.
The use of Activity Based Costing Systems is especially important to businesses offering customized services since it helps in allocating direct actual services in order to spot a product’s true price. Implementing ABC is an uphill task for any business since the method equivalently carries many benefits and limitations. The system directs the price of services and supports them in such a way that an image starts to emerge of the business sectors that are performing well and those that need improving. By determining the value of resources that contribute to the production of a service, companies are able to avoid unnecessary losses that stem from poor budgeting (Fei & Isa, 2010). In this regard airline companies will want to initiate non-value supplementary activities and to establish economical and effective allocation of company resources within the company with the aim of increasing the overall profits. Utilization of ABC permits business entries to account for prices that are inclusive of labor and the running costs thus helping managers determine overhead costs. Furthermore, information obtained normally prevents wastag...