Activity-Based Costing (ABC) at United Parcel Services (UPS)

Activity-Based Costing (ABC) At United Parcel Services (UPS)
Student Name
Class Name
Professor Name
University Name
Date

Abstract
The report discusses the costing technique United Parcel Services (UPS) used, its associated issues, factors contributing to those issues, and the solutions. UPS relies on an Activity-based costing process where cost is allocated for every activity. It helps managers understand what drives expenses and profitability in their business. That means they can see how changes in practices might affect costs and profits, allowing them to make adjustments before significantly impacting operations. However, the company faces challenges like finding the right cost driver, identifying which orders to include, and changing cost drivers over time. The theories used for the situation analysis are expectancy theory and complexity theory. The three recommendations are integrating logistics solutions, modifying distribution networks to reduce cost, and data mining techniques.
Table of Contents TOC \o "1-3" \h \z \u Abstract PAGEREF _Toc87604272 \h 21.Introduction to United Parcel Services (UPS) PAGEREF _Toc87604273 \h 42.Activity-based Costing in UPS PAGEREF _Toc87604274 \h 53.Problem Identification PAGEREF _Toc87604275 \h 64.Factors Contributing to Problem in ABC at UPS PAGEREF _Toc87604276 \h 65.Economies Theories, Tools and Methodologies to Analyze the Situation PAGEREF _Toc87604277 \h 75.1Theories Applicable PAGEREF _Toc87604278 \h 75.2Tools Analysis in the Problematic Situation PAGEREF _Toc87604279 \h 85.3Methodologies to Analyze the Situation PAGEREF _Toc87604280 \h 86.Solutions to the Problem PAGEREF _Toc87604281 \h 97.Conclusion PAGEREF _Toc87604282 \h 10References PAGEREF _Toc87604283 \h 11
Activity-Based Costing (ABC) at United Parcel Services (UPS)
Introduction to United Parcel Services (UPS)
UPS is a global package delivery services company. UPS has more than 220,000 employees and delivers about 15 million packages a day. The founder of UPS, James E. Casey, was not happy with the slow progress of trains and motorized wagons to deliver goods after the Great Chicago Fire in 1871. He proposed a new mule-powered delivery system to replace trains or horse-driven wagons for deliveries between cities (United States Postal Services, 2021). This new system would deliver packages faster and more efficiently than the trains and wagons at a cost that was less than either of these modes. James E. Casey built the first UPS headquarters in Cleveland, Ohio, in 1907. UPS has gone through many changes since it was founded. In 1906 UPS billed itself as “The World’s Largest Shipping Line.” Today UPS is a global logistics company with worldwide operations. UPS has the world’s largest fleet of roughly 275,000 tractors, 190,000 trailers, and 175,000 drivers that deliver packages in over 220 countries. UPS has launched its delivery service available in over 100 countries (Kujacic et al., 2015).
The United Parcel Service (UPS) is based out of Louisville, Kentucky. The company operates three primary business segments: Domestic Ground, International Ground, and International Air. They also have a Logistics segment that focuses on providing supply chain solutions to customers around the world. Currently, the company relies on the activity-based costing (ABC) system (United States Postal Services, 2021). The report emphasizes the issues the company faces in the lenses of the activity-based costing strategy adopted by the business. Based on which managerial accounting theories and tools will be analyzed to propose a solution to UPS.
Activity-based Costing in UPS
Activity-based costing is a method of pricing that costs a company’s products and services by the expenses required to produce them. In other words, it assigns a cost for all of the resources used in delivering a product or service, including its packaging or advertising campaign. The United Parcel Service (UPS) has been using this method since 1988 when they introduced their new activity-based costing system (United States Postal Services, 2021). . It helped make their pricing system more efficient and offer better service at lower prices.
The UPS activity-based costing system quickly spread throughout the industry because it was so efficient and automated. The essential elements of this system are stored in a computer database. When a customer places an order, all needed materials are added to the database. When the materials are shipped, they are marked as used or returned. The materials are then subtracted from the inventory. The costs of shipping, labor, advertising, and others are added to the materials used to calculate the final price based on the activities. Implementing this method was made easy because every package delivered is electronically tagged with its price (Kujacic et al., 2015). The UPS activity-based costing system can be easily changed or updated by simply adjusting a few numbers in the computer database. This system has been highly successful for the company, reducing prices while still turning a profit.
Figure 1: Use of ABC
Source: Crew & Brennan, 2015
Figure 1 shows that the ABC system is developed to link operating behavior to product and customer segment cost, make efficient pricing decisions and report consistent profitability results by each service offered.
Problem Identification
The company struggles to successfully implement the ABC costing because the network is too efficient for shares adjusts to meet changing demand. Resources are shared in different product lines; hence, UPS faces issues in identifying unique cost differences. The company struggles to find activities to reach the package to the final destination, finding required information system resources, the share of activities and resources finding, and the cost of each activity and resource (Crew & Brennan, 2015).
Factors Contributing to Problem in ABC at UPS
ABC method is used for process improvements due to its holistic nature. It also reduces the amount of data required for an activity-based costing system and the amount of time it takes to complete an activity-based costing report or summarize data into a spreadsheet. However, it poses several challenges as well (Cannavacciuolo et al., 2015). The factors contributing to inappropriate ABC Costing at UPS are:
Find the Right Cost Driver: The first challenge is that the cost drivers are not always well defined. ABC assigns costs to various tasks within an organization. Moreover, to determine which activities should be grouped, the model relies on ‘cost drivers’ of each activity—elements that can be measured and tracked over time. For example, an organization that manufactures widgets might identify the following cost drivers for widget production: machine hours, product changes, and scrap rate. Management can then track these cost drivers for each widget-production task across time (Cidav et al., 2020). In this way, management can determine whether a change in one or more of these elements affects its bottom line. The whole process is very challenging to initiate and implement rightly (Hensen et al., 2021). Using the widget company example again, product changes are a good choice, but machine hours are not. ABC’s cost driver list can become cluttered with processes that are only loosely related to the chosen process.
Identifying which Order to Include: The second challenge is that it can be challenging to determine which customer’s orders should be grouped for activities. The second challenge in activity-based costi...