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Activity Based Costing Example

  

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activity based costing seminar
"Knowing our cost of activities, services, and customers has made a big difference in the way we design our services, plan, and manage our business.  AIM has made us all more effective"
Jim Karagiorgis, Chief Transformation Officer, Master Six Sigma Blackbelt, Vytra Health Plans, speaking about AIM-Activity Information Models.


Activity Based Costing Exhibit 1

This chart provides the activity cost for each line of business (insurance product). It is used by an insurance carrier and it was created during a 9 week project that was conducted with the company's offices throughout the USA.

  
 

 

                          

 
Activity Cost for Line of Business                  

 

 
  Total N/A admin task Auto Work Comp D&O Marine Umbrella General Liability Not Core Policy
Total $44,109,928 $6,481,378 $5,148,441 $2,939,963 $2,652,969 $3,063,519 $4,737,194 $18,307,341 $779,123
Admin task $7,156,166 5,867,007 253,673 69,687 218,607 139,164 220,558 336,488 50,983
Renewal Inforce Policy $23,443,201 466,384 2,518,179 1,548,393 1,725,274 1,674,722 2,880,048 12,145,463 484,739
Renewal Decline $471,611 6,774 53,840 69,882 31,833 44,808 70,091 182,871 11,512
Renewal Cancel $374,719 0 28,976 50,133 19,317 36,530 68,014 151,192 20,558
Renewal Correction $318,788 0 60,641 26,718 6,983 11,707 67,833 137,505 7,401
Submission Quote $5,454,183 85,519 1,085,507 656,154 296,851 173,046 489,436 2,644,645 23,024
Submission Decline $128,474 1,645 4,934 20,139 6,578 9,045 49,338 35,972 822
Submission Reject $44,195 0 3,289 4,112 0 5,547 13,157 17,268 822
Quote New Line Inforce $2,892,618 37,826 324,572 143,485 152,042 418,286 547,429 1,139,876 129,101
Q/NL Correction/Re-write $77,700 822 11,303 1,645 2,467 10,690 14,801 35,972 0
Endorsement $3,414,947 6,578 796,127 270,272 184,795 408,907 303,332 1,412,867 32,070
Audit $262,621 8,000 2,467 65,366 6,578 121,004 4,934 37,004 17,268
 
Activity Based Cost Exhibit 2

This chart provides the monthly cost of the resolution status for types of calls that an insurance company's call center handles. It is used to understand and reduce the costs of calls that are not closed to customers' satisfaction. The department improved "closed to customer satisfaction" by 16% and also reduced activity costs by more than $250,000. It was created during a 12 week project that was conducted with the company's call center.

  
 

 

 

 

 

 

 

                        
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Activity Based Cost/Management Exhibit 3  

This 3 part chart provides the process cost and hours for this portfolio of CD products. It is used by a bank to determine CD product profitability and forecast how staffing requirements will change as CD product volume changes. It was created during a 7 week project that was conducted with the company's centralized time deposit department.

  
 
CD Product Process Model Time Percent
Percent of the department's time that is spent on each process for each CD type.
Process Total 1 Month 3 Month 6 Month 12 Month 18 Month 36 Month
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Account inquiry 5.2% 7.1% 2.6% 3.1% 3.4% 4.2% 12.5%
Address change 0.3% 0.0% 0.7% 1.6% 2.4% 3.0% 3.4%
Cancel 5.5% 0.0% 4.3% 20.0% 10.3% 11.3% 6.3%
Investigation 2.9% 5.8% 3.4% 3.9% 3.5% 4.2% 6.3%
Maintenance 13.0% 18.5% 18.1% 6.3% 6.9% 7.7% 8.9%
Monetary transaction 38.4% 33.0% 43.7% 46.9% 51.7% 23.3% 25.0%
New 32.6% 35.5% 27.0% 17.7% 20.9% 45.3% 36.3%
Partial pay 0.7% 0.0% 0.1% 0.3% 0.6% 0.8% 1.1%
Reconciliation 0.3% 0.1% 0.1% 0.2% 0.3% 0.2% 0.2%
 
             
CD Product Process Model Hours          
               
Process Total 1 Month 3 Month 6 Month 12 Month 18 Month 36 Month
Total 61,098 9,773 10,814.0 14,227.0 16,722.0 5,739.0 3,823.0
Account inquiry 3,177 694 281.164 441.037 568.548 241.038 477.875
Address change 183 0 75.698 227.632 401.328 172.17 129.982
Cancel 3,360 0 465.002 2845.4 1722.366 648.507 240.849
Investigation 1,772 567 367.676 554.853 585.27 241.038 240.849
Maintenance 7,943 1,808 1957.334 896.301 1153.818 441.903 340.247
Monetary transaction 23,462 3,225 4725.718 6672.463 8645.274 1337.187 955.75
New 19,918 3,469 2919.78 2518.179 3494.898 2599.767 1387.749
Partial pay 428 0 10.814 42.681 100.332 45.912 42.053
Reconciliation 183 10 10.814 28.454 50.166 11.478 7.646
 
 
CD Product Process Model Cost          
             
Process Total 1 Month 3 Month 6 Month 12 Month 18 Month 36 Month
Total 1,611,154 257,714 285,165 375,166 440,959 151,337 100,813
Account inquiry 83,780 18,298 7,414 11,630 14,993 6,356 12,602
Address change 4,833 0 1,996 6,003 10,583 4,540 3,428
Cancel 88,613 0 12,262 75,033 45,419 17,101 6,351
Investigation 46,723 14,947 9,696 14,631 15,434 6,356 6,351
Maintenance 209,450 47,677 51,615 23,635 30,426 11,653 8,972
Monetary transaction 618,683 85,046 124,617 175,953 227,976 35,262 25,203
New 525,236 91,488 76,995 66,404 92,160 68,556 36,595
Partial pay 11,278 0 285 1,125 2,646 1,211 1,109
Reconciliation 4,833 258 285 750 1,323 303 202
 

Activity Based Cost/Management Exhibit 4

This chart provides an insurance company with its Client Segment cost (listed across the top in revenue groups)
and the detailed cost for each segment's Line of Business (product). A set of these are used by branch managers to manage their customer segment profitability and Line of Business costs. It was created during a 6 week project that delivered a wide array of cost models to their 12 branches.

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