Activity Based Costing At UPS - University of North Texas

1 Activity Based Costing At UPSlLink operating behavior to Product and Customer segment costlSupport existing and new product pricing decisionslReport consistent and reliable profitability results by productUPS Developed ABC Systems to:UPS Developed ABC Systems to:Operating Costs Profitability CompanyOperating Costs Profitability CompanyBehavior Behavior ValueValue Identify the key activities within a function or process.

2 Measure the cost associated with the activities. Assign costs to products, customers and processes Based on the useof the Based Costing at UPS is a crossfunctional discipline requiring an understanding of our work Based Costing at UPS is a crossfunctional discipline requiring an understanding of our work Based Cost OverviewCollaboratively, Finance and Accounting, Engineering, IT and Operations produced a series of ABC models at , Finance and Accounting, Engineering, IT and Operations produced a series of ABC models at of Activity Based Costing at UPSlJIT was used to reduce inventorylEconomy was moving from manufacturing to more service basedlAn information driven business environment was developing Transportation needs were moving toward time definite, feature Based services.

3 Markets and technology were and technology were of Activity Based Costing at UPSUPS responded by developing new business strategies which focused on meeting customer needsUPS responded by developing new business strategies which focused on meeting customer needslDetailed knowledge of our cost to serve by Product and Customer became a priority lThe market drove the need to better understand specific segmentsof our business lA focus on average cost was no longer appropriate Activity Based Costing Overview Our operations are extremely complex with a wide variety of service options, operating conditions and support operations are extremely complex with a wide variety of service options.

4 Operating conditions and support LocationPickup LocationlCommercial Counters Letter Boxes Air Service Centers Customer CountersPickup TypeRegular AccountlCPUlOn Demand Late PM Call Tag ARSS tandard PackageLocal SortlInternationallAirlIncompatible over 70 pounds Drop Hazardous Materials Late P/U sCentral SortStandard PackagelHazardous MaterialslIncompatibleslover 70 poundslSmallslAir/Internat lTransportGround TransportlGrounded Air packageslAir MovementlRail MovementlLayover DriverlContract CarriersStandard PackageDelivery LocationCustomersPredeliveryDeliverylHaz ardous MaterialslIncompatibleslover 70 poundslTime CommittedlMulti Package Stops lTime SensitivelResidentiallCommerciallBldg TypelCODslConsignee Billing UPS sActivity Based Costing Approach At the same time, providing information about the package has become a major priority and has increased downstream the same time.

5 Providing information about the package has become a major priority and has increased downstream CtrDestCtrSortLocal SortPackage SortDelivery SortTransportTransportTravel to CustomerTravel from CustomerCollect Electronic Billing Detail Scan PackagePackage Movement DetailScan PackagePackage Movement DetailCapture DataOn InternationalShipments Input ExceptionsTransmit Delivery VerificationCapture Delivery InformationUPS system is Based on traditional ABC in that it takes detailedFunctional Cost and Mapsit to Products Based on the Activitiesthat the Products driveUPS system is Based on traditional ABC in that it takes detailedFunctional Cost and Mapsit to Products Based on the Activitiesthat the Products drivePickup & Delivery Transport & SortPickup and Delivery Express ServiceInternational Service1DA1DA2 DADeferreGrouGrouTransport and SortExpress ServiceInternational Service1DA LettersExpress Letters1DA2 DADeferreGrouGrouDomestic AirInternational Service1DA LettersExpress Letters1DA PackagesExpress Packages2DA

6 PackagesExpedited PackagesDomestic GroundGround ServiceCWTI nformation ServicesInformation Services SystemsUPS sActivity Based Costing SystemUPS sABC System is unique in that it leverages our database of workmeasurementand package movementdetail to improve our understanding of Activity cost driversUPS sABC System is unique in that it leverages our database of workmeasurementand package movementdetail to improve our understanding of Activity cost driverslUPS has a substantial investment in Industrial EngineeringlWork measurement studies have been performed on work Activity at UPS as far back as studies provide important insights into the content of activities and the rate at which products drive these activities.

7 LUPS maintains detailed package flow control systemslHow products move through our system provides important cost access to this data allows for frequent re-calibration of our modelsUPS sActivity Based Costing System Activity Based Costing Overview The Challenge The Challenge lUPS has a highly efficient network of shared assets that constantly adjusts to meet are shared across product lines making it difficult toidentify unique cost of UPS package flow models provides a framework to begin to answer such questions as: What activities were needed to get the package to the final destination?

8 What information system resources were required? What share of the activities and resources did the package consume? What did these activities and resources cost?UPS sActivity Based Costing Approach Our ability to move packages between locations is another core competence. Our capacity to track a package s movement enhances our ability to accurately measure product cost. Our ability to move packages between locations is another core competence. Our capacity to track a package s movement enhances our ability to accurately measure product cost.

9 For Example:Customer in Marietta, Ga. sends a package to a customer in Asheville HubAshevilleCenterCustomer PickupMarietta CenterWe know the route the package will travel, the facilities it will pass through and the mode of transportation know the route the package will travel, the facilities it will pass through and the mode of transportation DeliveryActivity Based Costing OverviewUPS has the ability to leverage extensive work measurementand package movementdetail to measure product cost. UPS has the ability to leverage extensive work measurementand package movementdetail to measure product cost.

10 Pleasantdale HubCharlotte hrsMarietta CenterCustomer P/UCustomer hrsActivity Based Costing OverviewAtlanta GatewayLouisville Block Block hrsMarietta CtrAlamosaFdr a/c GatewayDenver GatewayAlamosa Block hrAirfeed cost are Based on Aircraft type, distance flownand number of flight cost are Based on Aircraft type, distance flownand number of flight from our ABC System Support many Current ApplicationsInsights from our ABC System Support many Current ApplicationsPerformanceMeasurementView of cost and profitability of a division byproduct across the & ForecastingActivity Based Forecasting to integrate financialbusiness plans with profit Reduction EffortsDatabase of cost information for internal costcomparisons and to ensure appropriate AdministrationSystemMonitoring system to track performance bycustomer and