Activity based Costing (ABC) in Service Industries
Activity based Costing (ABC) in Service Industries The Total Gym was developed 1974 by Tom Campanaro and his partners Dale McMurray and Larry Westfall of San Diego CA. The device encouraged “functional exercise” a way of duplicating movements the body performs in everyday life, with and against gravity. The device piqued the interest of Physical Therapists and other medical professional. The total Gym was found to engage all muscle groups, allowing over 100 functional exercises on different levels of inclined resistance. The device also featured a full range of motion and variable resistance levels (heavier resistance near the top and light resistance when more horizontal). The Total Gym is a brand name and product line of exercise machines used for strength training, stretching and Pilates training designed by EFI Sports Medicine Inc. of San Diego, Ca. The various models are manufactured for 3 different types of customers: Medical and Fitness Facilities and Home Consumers (“History of Total Gym”. 2013). Total Gym is the world’s leading privately-held manufacturer of functional and bodyweight training equipment. Founded in 1974, the San Diego-based company’s Total Gym products are used in 14,000 physical therapy clinics, athletic training facilities, hospitals, universities, professional sports teams and health clubs, inspiring over 24 million workouts per year worldwide. Total Gym has a 15-year relationship with American Telecast Products, LLC, which launched the Total Gym bodyweight trainer into the consumer market with the longest running television infomercial in history, selling over four million units. Now with distribution in 23 countries, Total Gym continues to lead the industry with the latest functional training equipment and the award-winning GRAVITY System in commercial fitness program (“History of Total Gym”.2013). Total Gym has chosen to use the activity-based costing (ABC) system, which is the approach taken to allocate overhead costs. In using this costing system it requires Total Gym to identify the activity cost pool (sometime called cost drivers), this is the overhead cost attributed to ordering materials or setting machines. Also, cost pool is needed to show cause-effect relationship with the resources consumed. Products consume activities, and activities consume resources. (Weygandt, Kimmel & Kieso. 2012). The first stage to ABC system in Total Gym was to allocate cost to cost drivers and an example of cost drivers in the company Total Gym would be ordering materials, setting up machines and the assembling and inspecting of product. The second stage is to assign overhead to the cost pools by using cost drivers. Cost drivers are the number of activities performed to produce a product or provide a service. In Total Gym’s case the cost pools would be purchasing, storing, machining and supervising. And the cost drivers would be the number of purchase orders, the amount of square footage, the number of machine hours and the number of employees (Weygandt, Kimmel & Kieso.2012) When Total Gym implemented this system it provided management with valuable insights. For example this new cost system allowed Total Gym, to estimate return on sales and investments results for the product. Total Gym was able to effectively control their inventory, improve their budget and increased the bottom line by increasing sales volume and cost control. Total Gym has been successful in using the ABC system but often would like to know if there were no limitations how well could their success really be. Thus, we will apply time-driven activity based costing (TDABC) principles to Total Gym’s existing ABC system. In using the TDABC system it eliminates the need for interviewing and surveying to define resource pools, it relied on time estimates by establishing the process of direct observation. When the TDABC uses time equations it accounts for the complexities in operational transactions, which reflects the particulars and eliminate the need for tracking multiple activities and cost that is associated with one single activity (Stout & Propri.2011) In conclusion the benefits to Total Gym have been enormous. TDABC systems have made it easier to maintain and update, through the use of time equations. TDABC has made is easier for managers at Total Gym update the capacity cost rates and/or unit-time estimates as operating conditions change. By expressing capacity in units of time, TDABC enables Total Gym to become more accurate in the representation of over/under capacity. By using the because of the traditional ABC system the cost performance tend to be overestimated, thus this resulted in inaccurate capacity usage. Compare to traditional ABC system TDABC simplified many steps. Going forward Total Gym will be implemented to reinforce Total Gym’s review on the low cost center.

References
Total Gym Global Corporate. 2013. History of Total Gym. Retrieved from https://www.totalgym.com/t-About_AboutTotalGym.aspx

Weygandt, Kimmel , and Kieso. 2012. Managerial Accounting: Tools for Business Decision Making. John Wiley & Sons. Hoboken, NJ

Stout & Propri. (2011). Implementing Time-Driven Activity-Based Costing . Management Accountign Quarterly. Volume 12. No. 3