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Customer Profitability Analysis (CPA) with Time-Driven Activity-Based Costing (TDABC)
A Case Study in an Icelandic Travel Agency
Eva-Charlotte Haensel
Final assignment for a BS-degree in Business Administration
Instructor: Bjarni Frímann Karlsson
Supervisor: Bolli Héðinsson
Faculty of Business Administration
School of Social Sciences, University of Iceland
January 2017
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Customer profitability analysis with time-driven activity-based
costing.
This thesis is a 12 credit final assignment for a BS-degree from the
Faculty of Business Administration, School of Social Sciences of the
University of Iceland
© 2017, Eva-Charlotte Haensel
The thesis may not be reproduced without the author’s permission.
Printing: Háskólaprent
Reykjavik, 2017
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Preamble
This thesis is a 12 credit points final assignment for a BS-degree from the Faculty of
Business Administration, School of Social Sciences of the University of Iceland. Instructor
of this assignment is Bjarni Frímann Karlsson, Bolli Héðinsson supervised it. We want to
thank Bolli Héðinsson for his constructive and well targeted critics and his time and effort.
Moreover, we thank the travel agency in which we conducted our case study. All
employees of the travel agency supported us during our research. This assignment would
not have been possible without their patience and willingness to answer questions and
show documentation. The owners of the travel agency facilitated this research with their
openness and kindness.
Last but not least, the author’s mother, Alix Haensel and the author’s spouse Andrés
Andreasen, deserve thanks, as they reviewed the style and understandability of this
essay.
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Abstract
As competition in the Icelandic tourism industry increases and resources run out,
customer profitability analysis, in the following called CPA, becomes increasingly
important. This assignment shows how time-driven activity-based costing, in the
following called TDABC, is a feasible and beneficial for CPA in Icelandic travel agencies.
The 2004 by Kaplan and Anderson developed TDABC is an accounting approach which
assigns overhead cost to specific products or customers on the basis of their effective
resource consumption. TDABC facilitates the inclusion of overhead and indirect cost into
CPA.
We developed and implemented a TDABC system in a case study in an Icelandic travel
agency. Our seven-step TDABC system structures customers into groups and costs into
resource pools. It links overhead costs to specific customers by measuring how much
resource time all activities performed for them consume. As a result, it calculates
customer profitability on the basis of direct and indirect costs.
The results of this case study show how Icelandic travel agencies can analyze costs and
compare the profitability of different customers and customer groups. Moreover, it can
be shown that indirect costs need to be considered when analyzing customer
profitability. The profitability calculated in the case study by TDABC is disproportional to
customer profitability that is only based on markup on direct costs. The travel agency of
the case and other Icelandic travel agencies can use CPA by TDABC for better profit
management and process improvements.
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Table of contents
1 Introduction ......................................................................................................... 9
2 Cost accounting theory ...................................................................................... 11
3 Research design ................................................................................................. 14
3.1 Research strategy ....................................................................................... 14
3.2 Research approach ..................................................................................... 15
3.2.1 The interviews ..................................................................................... 15
3.2.2 The data .............................................................................................. 16
3.3 Research implementation .......................................................................... 16
3.3.1 Design of the TDABC system ............................................................... 16
3.3.2 Sampling .............................................................................................. 17
4 The travel agency of the case study .................................................................. 19
4.1 The travel agency ....................................................................................... 19
4.1.1 The brand ............................................................................................ 19
4.1.2 The staff .............................................................................................. 19
4.1.3 Business facts ...................................................................................... 19
4.2 The micro-environment of the travel agency ............................................ 20
4.2.1 Customers ........................................................................................... 20
4.2.2 Suppliers .............................................................................................. 21
4.2.3 Competitors ........................................................................................ 21
4.3 The macro-environment of the travel agency ........................................... 22
4.3.1 Economic environment ....................................................................... 22
4.3.2 Social environment ............................................................................. 22
4.3.3 Future of the tourism in Iceland ......................................................... 23
4.4 The current profit management of the travel agency ............................... 24
4.4.1 Pricing .................................................................................................. 24
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4.4.2 Markup on direct costs of 2015 .......................................................... 25
4.4.3 Current role of overhead costs for profit management ..................... 25
5 CPA in the travel agency by TDABC with a seven-step system ......................... 27
5.1 Step 1: Define customer groups ................................................................. 27
5.1.1 Sampling .............................................................................................. 29
5.2 Step 2: Calculating direct costs .................................................................. 31
5.2.1 Customer group 1 and 2 ..................................................................... 31
5.2.2 Customer group 3 and 4 ..................................................................... 32
5.3 Step 3: Identify activities necessary to sell to a customer ......................... 33
5.3.1 Marketing ............................................................................................ 33
5.3.2 Booking with consulting ...................................................................... 34
5.3.3 Administration .................................................................................... 34
5.4 Step 4: Group costs into resource pools and business sustaining costs .... 35
5.4.1 Resource pool no. 1: Travel agents’ capacity ..................................... 36
5.4.2 Resource pool no. 2: General marketing capacity .............................. 39
5.4.3 Resource pool no. 3: Additional marketing capacity .......................... 41
5.4.4 Business sustaining costs .................................................................... 43
5.5 Step 5: Establish source consumption rates .............................................. 45
5.5.1 Resource no. 1: Travel agents’ capacity .............................................. 45
5.5.1.1 Time-driver no. 1: E-mails of the employees of resource no. 1 ...... 46
5.5.1.2 Time-driver no. 2: Booking lines in sales software ......................... 47
5.5.1.3 Time-driver no. 3: Items in group trips ........................................... 49
5.5.1.4 Unmeasured resource activity ........................................................ 50
5.5.2 Resource no. 2: General marketing capacity ...................................... 51
5.5.3 Resource no. 3: Additional marketing capacity .................................. 53
5.6 Step 6: Calculating costs according to effective use of capacity................ 53
5.6.1 Cost per minute of effective capacity of resource no. 1 .................... 53
5.6.2 Travel agents’ capacity cost for a customer unit ................................ 55
5.6.3 Marketing cost for a customer unit .................................................... 57
5.6.4 Total costs of the customer groups of our sample ............................. 58
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5.7 Step 7: Calculating profitability .................................................................. 58
6 Discussion of the results and benefits of the TDABC system ............................ 62
6.1 Comparison of profitability of customer groups ........................................ 62
6.2 Pricing according to TDABC ........................................................................ 62
6.3 Managing the profitability of specific customers ...................................... 64
6.4 General use of TDABC information ............................................................ 64
7 Conclusion ......................................................................................................... 66
References ............................................................................................................... 69
Appendix .................................................................................................................. 71
List of figures
Figure 1. Booking lines in the sales software. ..................... Error! Bookmark not defined.
List of tables
Table 1. Customer groups. ................................................................................................ 29
Table 2.Customer sample. ................................................................................................ 31
Table 3. Direct cost of group travelers. ............................................................................ 32
Table 4. Direct cost of individual travelers. ...................................................................... 33
Table 5. Worktime and salaries of resource no. 1. ........................................................... 37
Table 6. Resource pool no. 1. ........................................................................................... 39
Table 7. Resource pool no. 2. ........................................................................................... 40
Table 8. Worktime and salary of resource no. 2. ............................................................. 40
Table 9. Resource pool no. 3. ........................................................................................... 42
Table 10. Worktime and salaries of resource no. 3. ......................................................... 43
Table 11. Overhead costs allocated into resource pools. ................................................ 45
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Table 12. Resource consumption rates. ........................................................................... 50
Table 13. Consumption of resource no. 2. ....................................................................... 52
Table 14. Effective workhours of resource no.1. ............................................................. 54
Table 15. Cost per minute of resource no. 1. ................................................................... 55
Table 16. Calculation of customer’s consumption of resource no. 1 ............................... 56
Table 17. Marketing cost per customer unit. ................................................................... 57
Table 18. Average cost of the customer groups. .............................................................. 58
Table 19. Profitability of the customers of the sample. ................................................... 60
Table 20. Average profitability of customer groups. ........................................................ 61
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1 Introduction
The tourism industry in Iceland is booming. The number of travelers coming to Iceland is
steadily growing, with no end in sight. On the downside are concerns rising that Iceland’s
capacity to receive travelers gets exhausted (KPMG, 2016). If Iceland should have to limit
the number of tourists coming into the country, it seems sensible to focus on the most
profitable travelers. But how do we define profitability of tourists? One way could be to
analyze how profitable different customer groups are for travel agencies who organize
trips to Iceland.
From our own experience as an accountant in a travel agency we know that different
customers can vary a lot in their need of service. The cost associated with servicing
travelers is often not proportional to their volume of purchase. Therefore, we consider it
necessary to include service costs when analyzing how profitable different customer
groups are. Traditional accounting can only analyze the cost associated directly with
customers. Traditionally are all general service costs of a travel agency summarized as
overhead costs and cannot be related to specific customers. Innovative cost accounting
approaches, like the activity-based costing (ABC), analyze overhead costs better.
Therefore, they can be more suitable for a customer profitability analysis (Cooper and
Kaplan, 1991).
However, we could not find any travel agency in Iceland, that currently analyzes
customer profit with an innovative accounting approach. One reason that the activity-
based costing (ABC) is not used, could be that ABC was developed for manufacturing
companies. Its application can be cumbersome for service companies. A modified version
of ABC, called time-driven activity-based costing (TDABC), is though more suitable for
service companies (Kaplan and Anderson, 2004). TDABC could be a good approach for
Icelandic travel agencies to monitor the profitability of their customers.
It seems interesting to analyze how a TDABC system can work in an Icelandic travel
agency and if this approach is suitable to monitor the profitability of customers of
Icelandic travel agencies. How can a TDABC system provide valuable information for
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Icelandic travel agencies and why is monitoring of the markup on direct costs insufficient
for their customer profitability analysis?
In this thesis we analyze how time-driven activity-based costing can work in Icelandic
travel agencies and if its improves customer-profitability analysis in a significant way. In
order to be able to analyze the feasibility of a TDABC system for customer profit analysis
(CPA) in Icelandic travel agencies, we conduct a case study in a travel agency. We set up
a TDABC system and analyze the profit of four different customer groups.
This essay gives a short overview about the theoretic background of accounting by
TDABC and presents our research design. In order to point out the need for CPA by TDABC
in the Icelandic travel agency industry, the travel agency of the case, its environment and
its current profitability management are introduced. This background information
provides the reader with the necessary insight to appreciate the result of our research.
The result of our research is a detailed illustration how our TDABC system functions in
the travel agency of the case. Moreover, the benefits of the TDABC system for the travel
agency are discussed. We finally evaluate the practicability and usefulness of TDABC for
CPA in Icelandic travel agencies on the base of our experience in the case study.
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2 Cost accounting theory
Juran (1988) suggests a rule which he names after the Italian economist Pareto principle:
Only 20% of all customers of a company create 80% of its profit. To identify these
profitable 20% of customers an elaborated customer profitability analysis (CPA) is
needed. According to Cokins CPA is indispensable for all modern companies as all value
created for the shareholders comes from a company’s customers. Therefore, any
company needs to focus on those customers which generate the biggest profit margin.
Traditional gross profit margin reporting fails though to picture service and other
customer related expenses. A multilevel cost assignment is needed to truly analyze
customer profitability (Cokins, 2015).
In the mid-eighties Cooper and Kaplan invented the activity-based costing (ABC), an
accounting approach which allocates overhead costs occurred by service activities
according to the actual consumption of a customer. This system gives a much better
picture of customer profitability than traditional cost accounting, as it doesn’t allocate
overhead costs arbitrary on products and customers (Cooper and Kaplan, 1988). All
activities, which are needed to produce a product or service a customer, are recorded. In
addition, it is determined how much an organization spends on each of these activities.
Activity cost pools are formed which contain also indirect and support costs. In this way
are overhead costs analyzed and divided into specific categories. Activity cost pools are
then divided among specific products or customers. This is done by allocating costs based
on each customer’s or product’s use of cost drivers (Kaplan and Cooper, 1998).
Traditional accounting records product-related expenses, and estimates customer
profitability on the basis of them. Activity-based costing focuses on more than the profit
margin of resale or direct production expenses by analyzing customer sustaining
activities. ABC reveals the link between these activities and their demand on companies’
resources. Managers get a clearer picture how customers and products generate
revenues and consume resources. Therefore, they are able to adjust prices in relation to
costs, influence customers´ behavior to reduce costs and focus their attention on the
most profitable customers (Cooper and Kaplan, 1991).
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Peter Drucker (1995) estimates that the activity-based costing approach lowers
manufacturing costs by up to 30%. This is due to the fact that ABC does not only reveal
the exact cost of each product and customer, but also analyses how costs are generated.
One single ABC system performs value analysis, process analysis and quality
management. Drucker believes that service companies can profit from such an analysis
even more than manufacturing companies. In order to benefit, managers need to use the
information generated by ABC to adjust capacity and processes.
Practical applications of activity-based costing show how important this approach is
for service companies. A Polish service company realized that 20% of its customers were
most profitable. The company’s revenue could increase about 55% by only servicing
them. At the same time 20% of the company´s customers created a loss of 31,5% (Kuchta
and Troska, 2007). An ABC analysis of the customers of an American employment service
company revealed that 70% of its customers were generating losses and identified the
exact overhead costs which were responsible for this (Searchy, 2004).
Although activity-based costing allows a better control of overhead costs and leads to
better management decisions, it has disadvantages which impediment many companies
from using it. It can be cumbersome and expensive to generate all data needed for ABC.
Often it is difficult to assign all costs to activity pools and a company might engage in a
large number of activities, which cannot all be correctly assigned to specific products or
customers (Weygandt, Kimmel and Kieso, 2012).
To deal with these problems, in the beginning of this century Kaplan and Anderson
developed a less complex approach called time-driven activity-based costing (TDABC).
TDABC is suitable for service companies who perform multiple activities, as the only data
required to allocate service costs are the cost per minute of supplying capacity and the
amount of time a product or customer consumes. Overhead costs are allocated according
to the estimated use of minutes of resources of each customer. The cost per minute is
estimated with regard to the practical capacity of all resources, that are needed to service
a customer. It is no longer needed to first measure the cost of all activities one resource
can provide, and then calculate the costs of these activities and the consumption of one
customer or product of these activities. Managers directly estimate the resource
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consumption of a customer by measuring how many minutes of resources the customer
requires (Kaplan and Anderson, 2004).
The time-driven activity-based costing (TDABC) generates as accurate profitability
information as the traditional ABC approach and allows managers therefore to improve
processes and customer profitability. In comparison to ABC is a TBABC system cheaper to
build and less complex to sustain and update. Moreover, it is easier adaptable to changing
conditions as it takes into consideration that different customer can use different
amounts of time for the same activity. Another advantage is that time-driven activity-
based costing deals with practical capacity and doesn’t overprize products by assuming
that 100% of all capacity is used productively. The practical capacity of a resource is the
resource time available after deducting time used for pauses and social activities. TDABC
allows also to analyze if the practical capacity of a company is fully used, an information
that is important for service companies with unstable demand. If the service of all
customers requires less than the company´s practical capacity, it can be concluded that
the company’s capacity is too big or employed in other ways than servicing profit
generating customers (Kaplan and Anderson, 2007).
Dalci, I., Tanis, V. and Kosan, L. (2010) showed in a case study in a Turkish hotel that
time-driven activity based costing suits well for the tourism industry. Servicing different
customer groups required in the case study many activities and sub-activities and
involved all kinds of costs. The cost of servicing each customer group could be well
measured by observing how many minutes of resource times were consumed by different
customer groups. The TDABC system proved itself to be easily adjustable to different
service levels and changing conditions. The case study also showed that practical capacity
was not optimally used and managerial decisions were needed to improve productivity.
Dalci, I., Tanis, V. and Kosan, L. mention though that further case studies need to be done
to establish if time-driven ABC is always the best approach to evaluate customer
profitability in the tourism industry.
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3 Research design
3.1 Research strategy
A case study seemed the most appropriated research strategy. Case studies should be
chosen to answer how- and why-questions about a contemporary research object which
cannot be manipulated by the researcher. They can deal with many variables of interest
and multiple sources of qualitative and quantitative evidence and describe interventions
in the real-life context they occur (Yin, 1994).
The implementation of time-driven activity-based costing to monitor customer
profitability in a travel agency needs to be observed in the context of a travel agency. It
cannot be reproduced in an experiment, as we need real life evidence like accounting
data and observation of customers’ behavior. With this case study we want to answer the
question why and in which way time-driven activity-based costing, in the following called
TDABC, is the appropriated tool for customer profitability analysis in Icelandic travel
agencies.
Case studies have been criticized to deliver little basis for scientific generalization. A
single-case study can though be used as exploratory device and be followed by multiple-
case studies to confirm its findings (Yin, 1994). In this sense our case study is a first step
to analyze the impact of TDABC for the Icelandic tourism industry.
Yin (1994) further recommends that critical cases should be chosen for single-case
studies, which allow to test well formulated theory. We consider the travel agency chosen
for this case study an appropriated real-life example of Icelandic travel agencies to test
the well formulated TDABC approach. The travel agency chosen can be regarded as
critical case as its product mix and structure is similar to other companies on the Icelandic
travel agency market. Its size is under average but this makes it possible to demonstrate
basic TDABC procedures without unnecessary complication.
Our case study suits as a pilot study for the realization of TDABC in Icelandic travel
agencies. Following case studies could build on the approach described in this study when
analyzing multiple cases.
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3.2 Research approach
Having received a presentation by e-mail, the owners and managers of the travel agency
agreed to meet us. We explained them the idea of our research, its scope and its
implications for the company. We also discussed possible benefits for the company, like
a better knowledge of how resources are used and which consumers are most profitable.
The owners and managers were very positive in regard to university research projects.
They requested however that the results of the study and the name of their company
should not be published. In the highly competitive tourism industry accounting
information need to be protected (owner of the travel agency, personal communication,
16th of September 2016). After signing the in the appendix shown confidentiality-
agreement we were allowed to conduct a case study in the travel agency over a period
of three months. During this period, we analyzed accounting documentations, e-mails
and booking entries of the year 2015. In addition, semi-structured interviews were
conducted to learn more about the company and the process of servicing customers.
3.2.1 The interviews
Semi-structured interviews use pre-formulated questions with can be answered to
different extent and length. The goal of the interview is to learn about individual opinions
and the knowledge of interviewees on a specific aspect (Flick 2011). The purpose of the
interviews we conducted was to understand the nature of the business and the
customers. We also needed to evaluate how long different service procedures take and
how costs are generated. We conducted expert interviews with the managing director of
the travel agency and with four employees responsible for marketing, accounting and
booking. In addition, we follow the interviews up with further questions by e-mail, to add
to and clarify the information gained during the interviews.
Semi-structured expert interviews need to ask focused questions to retrieve the
experts’ expertise in a specific area (Flick 2011). We asked about 100 focused questions,
examples are:
Which work activities do you need to perform to service a customer?
How long does it take to write an e-mail in average?
What kind of expenses do you book under insurance costs?
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According to your estimation, which percentage of its worktime spends your staff productively working?
3.2.2 The data
The travel agency, where we conducted our case study, provided us with their financial
report of 2015 and other accounting documents. Moreover, we got access to all e-mail
and message programs and the booking software.
The data on which we base our TDABC system and profitability analysis needs to cover
a whole accounting year. This is due to the seasonal fluctuations the tourism industry in
Iceland is subjected to. The year 2015 is the only complete year available in which the
actual booking software has been used. Therefore, it seems sensible to base our analysis
on the data of 2015.
3.3 Research implementation
3.3.1 Design of the TDABC system
In the case study we implemented a time-driven activity-based costing. The seven steps
of this system are based on the approach Kaplan and Cooper recommended in 1998. We
modify the classic activity-based costing steps though according to the theory of time-
driven activity based costing. The results of our case study describe in detail how TDABC
works in praxis. The theoretic design of our TDABC system is the following.
In a first step are those groups of customers defined, whose profitability shall be
compared. Secondly, we calculate the direct costs of customers of all groups. In a third
step all activities necessary to sell to a customer are listed.
In traditional ABC the next step is to form activity cost pools for each activity by
identifying which indirect costs are associated which each activity of step three (Kaplan
and Cooper, 1998). According to Kaplan and Anderson (2004) does TDABC not require
such a detailed analysis of indirect cost. In our fourth step we group indirect costs into
resource pools. Several activities may make demand on the same resource pool. Indirect
costs which are regarded business-sustaining are according to Cooper and Kaplan (1998)
not divided as they support the organization as a whole.
A classic ABC approach requires in a next step to find activity cost drivers that link
activity cost pools to activities. The cost of each activity performed for a customer can be
calculated according to the costumer´s consumption of cost drivers. TDABC uses a similar
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but simpler approach. It doesn’t need to allocate each activity cost pool separately but
directly estimates how many minutes a customer consumes of each resource. To do so it
sets up time rates for different customer related activities each resource can perform. A
customer’s use of resource time is calculated by multiplying the times he used a resource
activity by the time rate of that activity. The total cost of many activities a resource can
perform for one customer can be calculated by the percentage of total resource-time a
customer consumes (Kaplan and Anderson, 2007).
In the fifth step of our system we define resource consumption rates for the customer
related activities of our resources. We find time-driver related to various source activities
and calculate the time rate for various resource activities by estimating the resource time
these time-drivers consume. For resources which capacity is not measured in time, we
define what proportion of resource capacity specific customer groups consume.
The sixth step is to calculate the cost of specific customers by allocating direct costs
and indirect resource costs in accordance to their consumption. In order to measure a
customer’s consumption of resource time we calculate how many times time-drivers are
used. In order to calculate the cost of resource time, we divide the total cost of each
resource through the resource’s practical capacity measured in minutes. The customers’
consumption of resource time is then multiplied with the cost per minute of the resources
consumed to determine the indirect cost of a specific customer. Indirect costs of
resources which capacity cannot be measured in time is calculated by the percentage of
resource capacity a customer uses. Kaplan and Anderson (2004) mention that time is the
most frequent cost allocation basis in TDABC, but other allocation bases can be used if
more practical. In a final step the profitability of specific customers is calculated by
deducting their cost from their revenue.
3.3.2 Sampling
Having established a system to measure customer profitability with TDABC we took a
stratified random sample of all customers to obtain random samples of each customer
group. A stratified random sample divides a population in subpopulations. From each
subpopulation are drawn simple random samples by drawing independently in a random
process from a population (Flick, 2011). We computed the profit of our sample customers
according to the TDABC system.
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The result of this study is a detailed illustration how a TDABC system works in the travel
agency of the case study. The implementation of our TDABC system allowed us to
evaluate the benefits and practicability of TDABC in regard to analyzing customer
profitability.
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4 The travel agency of the case study
4.1 The travel agency
4.1.1 The brand
The travel-agency of the case study has been operating 35 years which is a long time in
the Icelandic tourism industry. They sell tailor made tours around Iceland for tourists
traveling in rented cars. The company’s booklet and homepage show tours and activities
in Iceland, which are used as a base to compose travel packages according to individual
wishes. Moreover, the travel agency sells predefined guided round-trips. A guided tour is
sold to about 20 customers which travel together without knowing each other before
hand (E. Sigmundsdóttir, personal communication, 16th of September, 2016).
The company commits itself to environmental and social sustainability. A special
emphasize of their products is closeness to nature and high quality. Travel groups are
kept small and personal. Tourist guides are well educated and with long experience. Most
of them are Icelandic locals who speak fluent German. The travel agents purposely
employ a lot of time to personally consult customers and answer all their questions, so
that they can design holidays according to their customers’ needs. This policy results in a
very high satisfaction of customers and positive reviews (Travel agency, n.d. a).
4.1.2 The staff
In the office of the travel agency nine people work. In addition to this the company
employs tour guides when needed. The hierarchy of the office staff is flat and
diversification is low. Five employees are booking agents and customer consulters. One
of these five is in addition to booking also responsible for the company’s marketing and
website. The accounting is done by one full-time and one part-time accountant. The
owners of the travel agency work as managing director and office manager (Travel
agency, n.d. b).
4.1.3 Business facts
According to the company´s annual report the company had a turnover of ca.
500.000.000 ISK in 2014 and ca. 470.000.000 ISK in 2015 (Travel agency, 2016 a). 37% of
the turnover was generated by group travelers. The company sold 26 group trips which
consisted in total of 468 travelers. In addition, 368 individual tour packages were sold
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(E.Ö. Sigurjónsson, personal communication, 22nd of September 2016). The number of
travelers in one tour package varies between 1 and 6, an estimate average is 2,5 (A.
Steinbrenner, personal communication, 10th of September 2016).
While the company made an after tax profit of ca. 10,5 million ISK in 2014, it made a
loss of ca. 6,6 million ISK in 2015. Its debt to total assets ratio went from 63% in 2014 up
to 83% in 2015 (Travel agency, 2015 a). Solvency ratios, like the debt to total assets ratio
measure a company’s ability to survive over a longer period. In general, a low debt to
total assets ratio indicates that a company is able to repay its debts. Some companies
purposely operate on high leverage. However, a suddenly augmenting debt ratio can
indicate financial distress (Weygandt, Kimmel and Kieso, 2012).
The negative bottom line of 2015 and the augmenting debt to total assets ratio
indicate a need to review the company’s financial position. A customer profitability
analysis might be a good tool to improve the company’s profitability.
4.2 The micro-environment of the travel agency
4.2.1 Customers
The travel agency we examined services almost exclusively German speaking customers.
They come mainly from Germany, Austria and Switzerland (owner of the travel agency,
personal communication, 12th of September 2016).
In winter 2013/2014 4,4% of all tourists in Iceland were German citizen and 1,4% came
from Switzerland (Icelandic Tourist Board, 2014a). In summer 2014 7,7% of all tourists in
Iceland came from Germany and 1,8% from Switzerland (Icelandic Tourist Board, 2014b).
German speaking tourists are therefore the second biggest group of tourists in Iceland,
the majority of tourists being English speaking.
In respect to other nations German tourists are more likely to visit other regions than
the greater Reykjavik area. They are generally satisfied with their experience in Iceland
and many of them plan to come back to Iceland or have been to Iceland before. In this
sense, Germans are desirable clients for a travel agency that organizes trips around
Iceland.
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The vast majority of Germans organize their trip without professional help. In 2014
only 13,2% of all German tourists booked travel packages. Those German tourists who
use the services of a travel agency care less than other nations whether their travel
agency has a quality certificate or not (Icelandic Tourist Board, 2014b).
German tourists seem to have enough disposable income to travel. The majority of
German tourist, that were interviewed in summer 2014, described themselves as having
a high or average income. Nevertheless, the price of their travel-packages was slightly
under the average of other nations, or about 306.000 ISK in summer 2014. Overall
German travelers spent less in Iceland than other nations (Icelandic Tourist Board,
2014b).
Considering their low spending and tendency to avoid travel agencies German tourists
could be described as particularly price sensitive. Competitive pricing might enable a
travel agency to reach German tourists who currently don’t buy travel packages.
4.2.2 Suppliers
The travel agency carefully chooses its suppliers to ensure high quality of its travel
packages. The managing staff regularly personally checks accommodations and other
elements of a travel package. Moreover, the travel agency constantly asks its costumers
for feedback, and adjusts travel packages according to previous customers’ satisfaction.
The supply of items of travel packages is not always enough. The travel agency tries to
establish long-term supplier relationships, to ensure sufficient supply of accommodations
and activities. A number of hotels reserve each year a fixed capacity which the travel
agency can use according to its needs. Other hotels enjoy such a huge demand, that they
are not interested in any special contact with the travel agency (E. Sigmundsdóttir,
personal communication, 18th of October 2016).
4.2.3 Competitors
According to the national phonebook 92 travel agencies operate in Iceland, most of them
sell to international tourists (Ferðaskrifstofa, n.d.). In addition, any online research shows
a multitude of foreign travel agencies offering package-tours to Iceland. The competition
22
on the market can be characterized as being very stiff, which makes an effective
profitability management very necessary.
According to E. Sigmundsdóttir (personal communication, 16th of September 2016) the
company produces often travel propositions, which require a lot of work time but don’t
result in sales. The customers who requested these propositions might either buy from
other travel agencies or use the propositions as basis to book themselves their Iceland-
holiday. So far, there has been no analysis of the resources spent on these non-profit
generating travel proposition. A better understanding of such costs of competition could
increase the travel agency’s profit.
4.3 The macro-environment of the travel agency
4.3.1 Economic environment
The tourism industry in Iceland has been growing rapidly during the last years and is
currently very prosperous. In 2015 its share of foreign exchange earnings was 31%, this
means that tourism was the biggest export good of Iceland. Five years ago tourism was
only 18,8% of Iceland’s export, the tourist industry used to be much smaller than the
fishing and aluminum industry (Icelandic Tourist Board, 2016).
The revenue from foreign tourists has grown in accordance with the growth of the
tourism sector. Between 2014 and 2015 the revenue generated from tourists increased
at each year’s price level at about 31%. The number of jobs in tourism-related industries
has increased as well. In 2014 about 37% more people worked in the tourism industry
than in 2010. Since 2010, 789 new travel agency and tour operator licenses have been
issued (Icelandic Tourist Board, 2016).
These data indicate that travel agencies encounter currently great profit possibilities.
At the same time, competition increases in the sector. Travel agencies need a solid
strategy and an effective profit management to profit from the current boom in tourism.
4.3.2 Social environment
The numbers of international visitors in Iceland have more than doubled since 2010. In
2010, 488.600 foreign tourists came to the country, in 2015 it was 1.289.140. These
numbers are though unequally divided between seasons. In 2015, 49,2% of all tourists
23
arrived in summer, 29,3% in winter, 17,6 % in autumn and 12,9% in spring. Tourists from
South- and Central-Europe are even more subjected to seasonal cycles, as 55,8% of them
arrive in summer. Tourists from the UK seem to be less affected by seasonality, 54,9% of
them came during winter to Iceland (Icelandic Tourist Board, 2016).
Occupancy rates of over-night accommodations fluctuate in accordance to the
seasonality of tourism. In the regions outside the Capital Region occupancy rates are in
summer up to 90%, in winter are they only around 20%. In the Capital Region occupancy
rates fluctuate between 66 % in December and 90% in July (Icelandic Tourist Board, 2016).
Travel agencies are less affected by seasonality than hotels, in the sense that tourists
traveling in summer don’t necessary book in summer. Often the main work of a travel
agency is done long time before the date of departure of a trip. Therefore, in contrary to
the rest of the Icelandic tourist industry, a travel agency´s busiest time is not necessary in
summer (A. Steinbrenner, personal communication, 3rd of October 2016).
Seasonality can affect the time it takes to assembly a travel-package. During periods
with high occupancy rates it can be much more difficult to find accommodations for the
customers. Therefore, it is often more time-consuming to book for tourists that travel in
summer (A. Steinbrenner, personal communication, 3rd of October 2016).
4.3.3 Future of the tourism in Iceland
Iceland’s future in tourism is according to KPMG (2016) influenced by two factors: its
competitiveness with respect to other locations and its ability to welcome growing
numbers of tourists. Depending on how well Iceland scores on these two dimensions four
scenarios are possible for the tourism industry of 2030. Iceland’s future tourism industry
could be prospering and well organized, or it could be unable to cope with a too big
demand. It is also possible that the tourism industry of 2030 will be well organized but
with too much supply, or it might not only face low demand but also be broken down.
Risk factors which might lead to a negative future development are e.g. a negative
attitude of the locals towards tourism, bad quality of touristic services, excessive strain
at tourist locations and lack of qualified workers in the industry. A recession in the home-
economies of tourists visiting Iceland could as well have negative effects on Iceland’s
tourism industry (KPMG, 2016).
24
In case the actual favorable economic and social environment for tourism in Iceland
should worsen in future, travel agencies would struggle to survive. Profit analyze and
profit management would become even more important than it is now.
4.4 The current profit management of the travel agency
4.4.1 Pricing
The travel agency of our case is currently not analyzing its customer profitability. All
customers are subject to the same pricing policy, which aims at a markup of 28% on costs.
This figure has been historically proven to cover all indirect costs and generate profits for
the travel agency. In praxis there are two different ways to price individual and group
travel packages (E.Ö. Sigurjónsson, personal communication, 22nd of September 2016).
When pricing group tours the direct cost of a tour is known exactly as all elements of
the package are booked in advance. The total direct cost of a specific tour is multiplied by
1,28 and then divided by 20 which is the average number of passengers in a travel group.
By this calculation is obtained a fixed sales price of a standard space in a specific travel
group. A supplement to the standard price is charged, if clients want to sleep in a single
room, as the standard price is calculated on the basis of double rooms. If the company
sells more than 20 spaces in one specific travel group, the effective markup on costs of
this travel group will be more than 28%. If the company sells less than 20 spaces, profit
will be lower than assumed. There are no strategies applied to stimulate demand or
manage profit by alternative pricing in case that 20 spaces cannot be sold (E.Ö.
Sigurjónsson, personal communication, 22nd of September 2016).
The pricing of individual tours cannot be standardized as every travel packages differs
according to the clients’ wishes. Travel agents compose individual travel offers and use
an average price of hotel accommodations and other travel elements to forecast the
direct cost of the individual package. The direct cost is then multiplied by 1,28 to obtain
a price offer for a potential individual customer. Once a travel package proposal is
accepted by a customer all elements of the package are booked. As actual hotel and
airfare prices may vary from average prices, the effective direct cost of a travel package
25
can be different from the cost forecast that was used to price the product (E.Ö.
Sigurjónsson, personal communication, 22nd of September 2016).
4.4.2 Markup on direct costs of 2015
Company intern documents (Travel agency, 2016b) show that despite adding 28% to the
forecasted direct costs of each product, the effective markup on costs for 2015 was only
24%. The effective markup is currently not calculated separately for group tours and
individual tours. According to the company’s accountant, E.Ö. Sigurjónsson (personal
communication, 28th of September 2016), the difference of 4% between planed and
effective markup ca be partly explained by currency rate changes. The exchange rate for
Euro to Icelandic crown was higher when prices were calculated than when hotels and
other travel package elements were paid. As the travel agency´s income is in Euro and its
expenses in ISK, the falling Euro-exchange-rate lowered the profits of the travel agency.
A customer profit analysis could help to understand better the difference between
desired and effective markup on cost, as it would show which customer groups cause
most of this difference.
4.4.3 Current role of overhead costs for profit management
Indirect costs or overhead costs are currently not considered in detail when pricing travel
packages (E.Ö. Sigurjónsson, personal communication, 22nd of September 2016). The
company´s internal bookkeeping defines indirect costs as all costs that is not due to the
purchase of products and services for resale. This cost is grouped into traditional cost
groups, like salary, cost of sales, office and management costs. The percentage of each
cost group of the company’s turnover is calculated monthly. This percentage varies a lot
between months, as travel packages can be sold long time before the cost of their
elements is billed for. Therefore, no connection between the sale to specific customers
and overhead costs can be currently established (Travel agency, 2016b).
The historical annual percentage of overhead costs to gross income, that the
company’s accounting currently provides, can be used to refine the company´s general
aspirated markup on direct costs. A general annual rate of overhead costs might though
not be detailed enough to be a reliable tool for future pricing decisions. It cannot account
for partial changes in the environment or the profit structure of the company. Moreover,
26
a general rate of overhead costs cannot explain how overhead costs are generated by
customers or products. Therefore, it cannot be used as basis for individual pricing or
process improving decisions (Kaplan and Cooper, 1998).
With its currently available accounting the company is not able to compare the
effective profitability of different customer groups. The available system could relatively
easily calculate the markup on direct cost separately for individual travelers and group
travelers. There is though no information available about the bottom line of specific
customer groups, as the current profit monitoring approach focus on the markup on
direct costs and omits the role of indirect costs (Travel agency, 2016b). A more detailed
analysis of the relation of overhead costs and customers’ profitability might give a better
basis for profit management.
27
5 CPA in the travel agency by TDABC with a seven-step system
A TDABC system can analyze how different customer groups of the travel agency generate
profits. It calculates direct and indirect costs for specific customers (Kaplan and Anderson,
2004). We present here the results of our case study, i.e. the TDABC system we installed
in the travel agency of the case. It calculates in seven steps the profitability of customer
groups according to their actual consumption of resources.
5.1 Step 1: Define customer groups
An analyze of the structure of the travel agency’s customers enables us to form four
customer groups.
Group travelers who book through another travel agency
Group travelers who book directly
Individual travelers who book after February
Individual travelers who book before March
The division between group travelers and individual travelers is important as group and
individual travelers consume resources differently. A group travel package is organized
and then sold to about 20 group travelers. Assembling a group package is more intense
work than assembling an individual package, as group packages are bigger and
necessitate a tour guide. But once the group package stands it can be sold to about 20
single customers with comparatively little effort. The packages of individual travelers
need to be specially composed for each customer, which requires time and resources (G.I.
Ingólfsdóttir, personal communication, 16th of September 2016).
The sub-division of individual travelers according to when the trip was booked is
important, as we want to analyze, whether customer consume more resources, if their
travel package is assembled shortly before their trip. The vast majority of travelers arrives
in summer, which means that travelers who book after February are on average booking
with shorter notice than travelers who book before March. The experience of our travel
agents shows that it can be very difficult in summer to find accommodations and activities
with short notice. When booking during the high season, travel agents have often to send
28
booking requests to many hotels until they find a free room (A. Steinbrenner, 9th of
September 2016).
Group travelers do not need to be divided according to booking times, as group
packages are assembled long time before they are sold. They are though sub-grouped
according to their purchasing behavior, i.e. whether they buy directly or indirectly from
the travel agency.
The travel agency sells group trips both directly to travelers and indirectly through
foreign travel agencies. Foreign travel agencies which resell our travel agency’s products
take commission for their services. Therefore, sales revenue for our travel agency is less
when sold indirectly. This might be offset by the fact that our travel agency needs to
provide less customer service when selling through other agencies.
The managers of our travel agency disagree whether it is feasible to sell through
foreign travel agencies. In its early days our travel agency sold frequently through other
agencies, but reduced indirect sales as the business grew. Only recently they started to
increase again the percentage of indirect sales. Foreign travel agencies used mainly to sell
spaces in travel groups. Since 2016 our travel agency has a contract which a foreign travel
agency to resell their individual tours. The managers have not decided yet, whether this
contract will be prolonged in 2017 (E.J. Sigmundsdóttir, personal communication, 16th of
September 2016).
Unfortunately, we cannot measure yet, the impact of the individual packages sold
through a foreign travel agency in 2016. The seasonal fluctuation of the business and the
currency rate changes between organization and transaction of a travel package require
to analyze costs and work input of a whole year to calculate customer profitability
adequately. The TDABC system that we install is based on data 2015 and only subdivides
group travelers according to whether they booked directly or not. All individual travelers
of the year 2015 booked directly and are therefore not further subdivided. Next year
complete cost data on individual travelers booking through foreign travel agencies will be
available. The customer groups of our TDABC system can then be further refined to
account for changes in the profitability of individual travelers according to whether they
book directly or indirectly.
29
The four customer groups illustrated in table 1 do not account for potential customers
that contact the travel agency for informational purposes but do not book any travel
package. The nature of a customer profitability analysis requires to analyze actual
customers, i.e. travelers that actually buy products which generate costs and revenues.
However, will we show in following chapters that TDABC can also be used to evaluate the
cost of servicing travelers that are no actual customers.
Table 1. Customer groups.
Customer groups
Group travelers
Group 1:
Group travelers who book
through another travel
agency
Group 2:
Group travelers who book
directly
Individual travelers
Group 3:
Individuals who book after
February
Group 4:
Individuals who book
before March
5.1.1 Sampling
The data processing system currently available doesn’t allow to analyze all individual
customers of a group, as we have to manually count the number of resource activities
performed for each customer. We can only analyze a sample of each customer group and
compare the average profitability of each customer group sample. The profitability of the
customer sample enables us to draw conclusions on the profitability of the population,
which are all customers of the travel agency (Flick, 2011). We do though not engage in
statistic considerations which would allow us to link the sample to the population in a
scientifically significant way. This would exceed the scope of this essay which is to analyze
the feasibility of customer profitability analysis with a TBABC system.
We divide all customers of the travel agency into group travelers and individual
travelers. By this classification of the whole population into stratified samples we make
sure that both subpopulations are equally represented in our sample (Flick, 2011). Out of
a total of 26 group trips sold in 2015, we draw a simple random sample of two group trips.
30
As can be seen in table 2, 15 passenger units of these two sample group trips belong to
customer group 1, i.e. they booked through another travel agency. 10 passenger units
belong to customer group 2, i.e. they booked directly. Out of 368 packages which were
sold to individual travelers, we draw a sample of 20 individual packages. 9 packages of
these sample packages belong to customer group 3, i.e. they were booked in summer, 11
packages belong to customer group 4, i.e. they were booked in winter.
In order to be able to compare group travelers and individual tourist we summon
group travelers into units. Single travelers traveling in the same travel group are often
related. We divide travel groups into units of passengers who booked together. These
units contain between one and four single persons, as can be seen in the column PAX in
table 2.
Units of group traveler are compared to the unit of travelers traveling together in one
individual travel package. Individual packages are most often sold to several individuals
traveling together, i.e. the total number of 368 individual packages sold in 2015
represents more than twice as many travelers. Table 2 shows also for individual travelers,
i.e. customer group 3 and 4, how many persons (PAX) traveled together in one individual
travel package.
31
Table 2.Customer sample.
5.2 Step 2: Calculating direct costs
5.2.1 Customer group 1 and 2
The second step of our TDABC system is to list up the direct costs of customers. With
direct cost we intend the cost of items that are resold, like the cost of hotel
No. Name1 PAX No. Name PAX
1 Helene Gazzi 2 1 Ralf Guetler 2
2 Marlis Merz 2 2 Christine Rickenbach 1
3 Hans-Christian Weber 2 3 Christina Dannenberg 2
4 Margrit Schröter 2 4 Jutta Bein 1
5 Sylke Kaija Rudolph 2 5 Helena Baeriswyl 1
6 Torsten Ostermeier 2 6 Sabine Jud 1
7 Maria Glaser 2 7 Dieter Pölloth 2
8 Ines Hildebrandt 1 8 Stefan Wolf 2
9 Bernd Werner Riedel 4 9 Sabine Dinkel 2
10 Wolfgang Stenzel 1 10 Wolfgang Keilbach 2
11 Sara Halbig 2
12 Anna Petersen 2
13 Heidi Haberl 1
14 Dagmar Dehling 2
15 Martin Schuhmacher 2
No. Name PAX No. Name PAX
1 Robert Findeisen 2 1 Rita Wartenberg 4
2 Theo Busch 2 2 Christina Demant 6
3 Helena Kleinert 1 3 Michael Raab 2
4 Inga Clausen 2 4 Irina Lex 1
5 Christine Liebl 2 5 Karin Anton 2
6 Adolf Link 2 6 Johannes Pirringer 4
7 Simon Lösch 2 7 Lothar Lissmann 2
8 Rüdiger Herrmann 2 8 Uwe Huchel 2
9 Heike Cox 2 9 Juerg Bissegger 2
10 Martin Zehentmaier 2
11 Sandra Wild 41 names have been changed for data protection reasons
Customer group 2
Customer sample
Customer group 3 Customer group 4
Customer group 1
32
accommodations and airfare tickets. The direct cost of our sample of group travelers can
be seen in table 3.
The travel agency documents the direct cost of each group package in an excel file.
The cost of all items of a group packages - excluding supplements for single rooms - is
divided through the number of travelers in one travel group and then equally allocated
to each member of the group. Supplements for single rooms are allocated directly to
those customers who slept instead of single rooms in double rooms.
Table 3. Direct cost of group travelers.
5.2.2 Customer group 3 and 4
The direct cost of individual travelers can be easily obtained from the sales software the
travel agency uses for booking all individual packages. The software records the direct
cost of all elements of a travel packages in Euro. In order to have comparable values in
ISK throughout the year, we multiply the direct cost in Euro by 145,5. This was the average
Euro-ISK exchange rate of 2015 (Landsbanki, n.d.). Table 4 shows the direct cost in ISK of
individual travelers of our sample.
No. Direct costs in ISK No. Direct costs in ISK
1 710.674 1 710.674
2 710.674 2 355.337
3 710.674 3 710.674
4 710.674 4 355.337
5 710.674 5 355.337
6 710.674 6 355.337
7 710.674 7 438.243
8 355.337 8 438.243
9 876.485 9 438.243
10 219.121 10 438.243
11 438.243
12 438.243
13 219.121
14 438.243
15 438.243
Customer sample
Customer group 1 Customer group 2
33
Table 4. Direct cost of individual travelers.
5.3 Step 3: Identify activities necessary to sell to a customer
In order to be able to calculate the cost associated with servicing customers, in the third
step of our TDABC system, we examine the process of servicing a customer. The travel
agency performs a multitude of service activities for each customer. These activities can
be summarized under three main activities:
Marketing
Booking with consulting
Administration
For the TDABC approach it is sufficient to examine how work-intense the main
activities of the service process are. We do not need to produce a list of all sub-activities,
as we do not have to form separate cost pools for each activity and sub-activity. Only a
classical ABC approach would require this in step 4 (Kaplan and Anderson, 2004).
5.3.1 Marketing
The travel agency reaches potential customers through marketing on Facebook and
Google. They run a detailed homepage which provides all information about their
services. In addition to this the travel agency designs and produces a booklet which
No. Direct costs in ISK No. Direct costs in ISK
1 329.994 1 932.946
2 465.891 2 1.034.214
3 197.298 3 558.284
4 593.640 4 632.925
5 245.895 5 488.735
6 375.390 6 857.432
7 435.045 7 710.040
8 236.438 8 423.987
9 371.316 9 357.348
10 532.967
11 714.114
Customer sample
Customer group 3 Customer group 4
34
illustrates all their products. Customers who book directly are also approached on sales
expositions in Germany. Moreover, a contractor of the travel agency work in Germany.
He markets the travel agency services directly in Germany and functions as a contact
person for travelers that book directly at the travel agency (A. Steinbrenner, personal
communication, 10th of September 2016).
5.3.2 Booking with consulting
All single services which are resold in a travel package need to be assembled and booked.
Travel agents book group trips through direct contact with the service provider, individual
packages are booked through a booking software.
A lot of communication is needed between the travel agency and the customer to sell
a travel package. Customers have questions and need all kind of consultation, while
preparing their trip to Iceland. In case of tailor made packages all services need to be
approved by the customer during the booking process. Travel agents communicate
mainly through e-mail with the customer. Occasionally they also talk on the phone with
customers, often these conversations lead to further communication by e-mail.
When a travel package is completed and paid, travel agents send travel documents to
the customer. The travel documents contain a description of each day and activity of the
trip. For individual travelers the travel agents prepare a map on which they mark all
locations of the trip. They also send individual travelers vouchers for each single element
of the package.
Once customers are in Iceland, they are provided with a special phone number they
can call if any problems come up. Guides of group tours use this number as well, if they
need any help during a group trip. (A. Steinbrenner, personal communication, 10th of
September 2016).
5.3.3 Administration
The same travel agent who has booked a package sends his customer an invoice for it.
Once the invoice is paid, the accountant registers the payment of the invoice in the
accounting software and sends customers a payment confirmation by e-mail. The
booking software automatically identifies travel packages which have not been paid in
time, the responsible travel agent reminds customers in this case about the due payment
35
by e-mail. According to the accountant of the travel agency no other actions are needed
to collect all receivables (S.A.R. Roloff, personal communication, 16th of September
2016).
Each item of a travel package needs to be paid by the travel agency. First the
accountant books incoming invoices of hotels and other service providers. The travel
agent who ordered the service then approves the invoices’ amounts and finally the
accountant settles the invoices. Once all expenses and income of a travel package are
registered the effective markup on cost is calculated by the agent who is responsible for
the package (A. Steinbrenner, personal communication, 10th of September 2016).
5.4 Step 4: Group costs into resource pools and business sustaining costs
If we applied a classic ABC approach to allocate indirect costs to customers, we would
have to divide all indirect costs into cost pools. We would form a cost pool for each
activity and sub-activity that is performed to service customers. In this way we would
establish the cost of each activity, for example the cost of sending out invoices. We could
then allocate a portion of each cost pool to specific customers based on the use of cost
drivers. If we were to send out 2 invoices to customer X and the total number of send out
invoices was 100, customer X would account for 2% of the total cost of sending out
invoices (Kaplan and Cooper, 1998).
In the fourth step of our TDABC system we group costs into resource pools. One
resource may perform more than one activity, as long as it is possible to estimate the
time the resource needs for its various customer related resource activities. In following
steps, we will allocate these resource pools to specific customers based on customers’
use of resource time (Kaplan and Anderson, 2004).
We form 3 resource pools:
Travel agents’ capacity
General marketing capacity
Additional marketing capacity
36
5.4.1 Resource pool no. 1: Travel agents’ capacity
Two main activities, namely booking with consulting and administration, and all sub-
activities that fall under these main activities are performed by the same resource, the
capacity of the travel agents. We call the travel agents’ capacity resource no. 1 and form
a resource pool that includes all cost related to booking with consulting and
administration performed during the process of selling to a customer. For facilitation we
call all activities performed by resource no.1 travel agents’ tasks, but we keep in mind
that the activities of this resource include not only traditional travel booking activities but
also administrative activities like the payment of hotel invoices.
In order to be able to set into resource pool no. 1 salaries and other costs related to
the employees working for this resource, we need to establish how much work power is
dedicated to this resource. Therefore, we register in row B of table 5 the employment
percentage of all employees working for this resource, i.e. whether they work full-time
or part-time. As some employees work for more than one resource, we also consider the
percentage of personal worktime each employee dedicates to the travel agent’s work-
tasks (see row C in table 5).
In the travel agency there are three travel agents who dedicate 100 % of their
worktime to the travel agents’ activities, i.e. resource no. 1. One of these three agents
works fulltime, i.e. 100%, two of them work part-time, i.e. 80%. In addition to the three
travel agents one full-time employee dedicates 90 % of his worktime to travel agents’
tasks but uses 10% of his worktime for marketing activities (A. Steinbrenner, personal
communication, 5th of October 2016). A fifth employee works on a full-time contract at
the travel agency, but employs only 65% of his personal worktime for travel agents’ tasks.
35% of his worktime are employed for the internet presence of the travel agency and for
marketing purposes (G. Ingólfsdóttir, personal communication, 3rd of October 2016).
Besides the capacity of the five employees who work fully or partly as travel agents,
we also include the work capacity of one accountant into resource pool no. 1. This
accountant works full-time and employs 100% of his time to perform customer related
administration activities, like the payment of accommodations or the registration of
payments from customers. As resource pool no. 1 includes all costs related to the
37
administration performed during the process of servicing a customer, the capacity of this
accountant is part of resource no. 1. In table 5 are listed all six employees of the resource.
All accounting related to general financial management, like the preparation of
financial overviews or general pricing policy is done by another accountant who works
part-time for the travel agency. The capacity of this part-time accountant is not included
in resource pool no.1, as his work cannot be directly related to specific customers (S.A.R.
Roloff, personal communication, 16th of September 2016).
Table 5. Worktime and salaries of resource no. 1.
The accounting of the travel agency provides us with the salaries of all of the
employees. In column C of table 5 we calculate for each employee working for resource
no.1, what percentage of the total company´s salaries he receives. We then multiply each
employee’s fractional salary with the fraction of personal worktime he dedicates to
resource 1. As a result, in column E of table 5 we find out that 53,1 % of all salaries of the
travel agency are dedicated to resource no. 1.
Thus we allocate 53% of all salaries of the financial statement of 2015 to resource pool
no. 1, which can be seen in the first line of table 6. Staff related expenses, like staff’s
cafeteria and education costs are allocated in the same percentage as the salaries.
The TDABC approach allocates costs of all kinds to workforce resource pools on the
basis of how these costs are related to the employees of a specific resource. When
customers consume time of employees of a resource pool, they consume indirectly all
other resources of the same resource pool in the same proportion. That’s due to the fact
A B C D E F
Resource-
employee
no.
Employment
percentage
(full-time or
part-time)
Percentage of
salary of all
salaries of the
travel agency
Percentage of
personal worktime
dedicated to
resource 1
Percentage of
salary dedicated
to resource 1
Percentage of customer
serving employees'
worktime dedicated to
resource 1
=C*D =D*B/SUM(B)
1 100% 11,7% 100% 11,7% 18%
2 80% 5,9% 100% 5,9% 14%
3 80% 7,4% 100% 7,4% 14%
4 100% 10,5% 90% 9,5% 16%
5 100% 12,0% 65% 7,8% 12%
6 100% 10,7% 100% 10,7% 18%
Total 560,0% 58,3% 555,0% 53,1% 92,0%
38
that the employees of a resource consume the other resources of a resource pool to
service the customers (Kaplan and Anderson, 2007).
Travel agents and other employees of the resource need office facility to service the
customer, therefore office facility related costs are included in resource pool no. 1. A visit
in the travel agency’s office reveals that the customer servicing staff of the travel agency
occupies 70% of the office facility. The customer servicing staff consists of six customer
servicing employees which happen to work all for resource no. 1. As explained above, are
though not all employees working full time and two of the six customer servicing
employees employ only a fraction of their personal worktime for resource no. 1. We need
to calculate the fraction of overall worktime of the six customer servicing employees that
is actually dedicated to resource no. 1, i.e. travel agents’ tasks. Therefore, in column F of
table 5, we multiply the percentage of personal worktime each employee employs for
resource no. 1 by his relative presence at work. With relative presence at work we intend
each resource employees’ personal employment percentage in relation to the sum of
employment percentage of all six customer servicing employees, see column F of table 5.
As a result of this calculation we learn that the six customer servicing employees employ
92% of their overall worktime for resource no. 1. We also know that these six customer
servicing employees occupy 70% of the travel agency´s office space. In consequence, 92%
of 70% of the office facility, i.e. 64% of the office is used for resource no.1.
Thus we allocate 64% of all real estate related expenses to resource pool no. 1 as can
be seen in table 6. Examples are 64% of all electricity expenses and 64% real estate
insurances costs of 2015. In this context we also include 64% of all interest payments of
the travel agency, as the only debt the travel agency has, is a housing loan for its office.
Other costs of sale, like paper and computer costs, are in table 6 allocated to resource
pool 1 in the percentage they are used by the travel agents according to the estimates of
the office manager (E. J. Sigmundsdóttir, personal communication, 16th of September,
2016).
39
Table 6. Resource pool no. 1.
5.4.2 Resource pool no. 2: General marketing capacity
The cost related to marketing activities cannot be allocated to specific customers on a
time-basis. We therefore need to create two resource pools on which different marketing
activities make demand. Resource pool no.2, which represents the general marketing
capacity of the travel agency, contains all cost related to general marketing activities.
General marketing activities are all marketing activities except marketing activities that
are included in resource pool no. 3. Resource pool no. 3, which we call additional
marketing capacity, contains all cost related to sales’ expositions and the contact person
in Germany. Each customer group uses each of the two marketing resource pools in a
different proportion. We will explain the cost allocation principle better in step 5 of our
TDABC system.
As can be seen in table 7, the general marketing resource pool contains all advertising
and homepage costs. In addition, we allocate to this resource pool 50% of the travel
agency´s foreign marketing costs. These costs are due to publishing the booklet of the
travel agency (Travel agency, 2006 b). Marketing through advertising, the homepage and
the booklet are general marketing activities.
Cost ( according to financial statement 2015) Total amountAllocation
percentage
Allocated
amount
Salary and salary related expenses 65.187.882 53% 34.549.577
Staff's cafeteria 1.200.470 53% 636.249
Educational cost 489.048 53% 259.195
Annual staff's party 1.577.960 53% 836.319
Gifts and grants for the staff 174.146 53% 92.297
Interests for housing loan 2.197.509 64% 1.406.406
Running facility costs 1.953.512 64% 1.250.248
Depreciation real estate and office equipment 1.966.461 64% 1.258.535
Phone and postage 1.481.470 75% 1.111.103
Office equipment and computer system 3.850.779 75% 2.888.084
Driving costs 1.811.100 10% 181.110
Insurances 1.130.892 45% 508.901
44.978.025
Resource pool no. 1: Travel agents' capacity
TOTAL
40
Table 7. Resource pool no. 2.
In addition, resource pool no. 2 contains the workforce of the marketing staff. In table
8, we use the same approach as for resource pool no. 1 to calculate the percentage of the
travel agency’s salary expenses that is employed for general marketing activities. Two
employees, which both work on full-time contracts, dedicate the in column D of table 8
specified part of their personal worktime to resource no 2. The two employees of
resource no. 2 happen to be the same individuals as resource employee no. 4 and no. 5
of resource 1, as the travel agency has only 6 customer servicing employees.
Nevertheless, we call these two employees resource employee no. 1 and no. 2, when we
look at resource pool no. 2. In this way the TDABC system can be easily adapted, if
individual employees are exchanged or additional employees employed in future.
Table 8. Worktime and salary of resource no. 2.
Cost ( according to financial statement 2015) Total amountAllocation
percentage
Allocated
amount
Advertisement and homepage 10.861.785 100% 10.861.785
Foreign marketing, traveling and sales expositions 7.461.281 50% 3.730.641
Salary and salary related expenses 65.187.882 4,9% 3.194.206
Staff's cafeteria 1.200.470 4,9% 58.823
Educational cost 489.048 4,9% 23.963
Annual staff's party 1.577.960 4,9% 77.320
Gifts and grants for the staff 174.146 4,9% 8.533
Interests for housing loan 2.197.509 5,3% 116.468
Running facility costs 1.953.512 5,3% 103.536
Depreciation real estate and office equipment 1.966.461 5,3% 104.222
Phone and postage 1.481.470 5% 74.074
Office equipment and computer system 3.850.779 5% 192.539
Insurances 1.130.892 5% 56.545
18.602.655
Resource pool no. 2: General marketing capacity
TOTAL
A B C D E F
Resource-
employee
no.
Employment
percentage
(full-time or
part-time)
Percentage of
salary of all
salaries of the
travel agency
Percentage of
personal worktime
dedicated to
resource 2
Percentage of
salary dedicated
to resource 2
Percentage of customer
servicing employees'
worktime dedicated to
resource 2
=C*D =D*B/560% 1
1 100% 12,0% 35% 4,2% 6,3%
2 100% 10,5% 7% 0,7% 1,3%
Total 200,0% 22,5% 42,0% 4,9% 7,5%1 560% is the sum of employment percentage of 6 customer servicing employees, see table 5
41
Resource employee no. 1 employs according to his own estimates 35% of his personal
worktime to general marketing activities, mainly online marketing. He takes care of
Google and Facebook advertisements and the travel agency’s homepage (G. Ingólfsdóttir,
personal communication, 3rd of October 2016). The second resource employee employs
according to his own estimates 7% of his annual worktime to general marketing activities.
He prepares and designs the travel agency´s booklet (A. Steinbrenner, personal
communication, 5th of October 2016). 35% of resource employee no. 1’s salary and 7%
of resource employee no. 2’s salary is 4,9% of the total salaries of the travel agency, as
can be seen in column E of table 8.
Thus we allocate 4,9% of the total salaries of the travel agency into resource pool no.
2. In addition, the general marketing resource pool contains also 4,9% of all staff related
expenses. Table 7 illustrates the allocation of 4,9% of salaries and staff related costs.
In order to be able to allocate facility costs into resource pool no. 2, we need to know
which percentage of total worktime of customer servicing staff is employed for this
resource. The total worktime of all customer servicing employees is in this case the same
as the total worktime of all employees of resource no.1, as all six customer servicing
employees are working for resource no.1. In column F of table 8 can be seen that 35% of
resource employees no. 1´s personal worktime and 7% of resource employee no. 2’s
worktime is together 7,5% of the total worktime of all employees that service customers.
Recall that the customer servicing staff occupies 70% of the total office space of the travel
agency. This means that 7,5% of 70% of the office, i.e. 5,3% of the total office space, are
used for general marketing purposes.
Thus, in table 7 we allocate to resource pool no. 2 5,3% of all costs related to the real
estate. Considering the application percentage of total office space and total salary costs
around 5%, it seems sensible to include also all other office related costs at a percentage
of five into the general marketing resource pool. The results can be seen in table 7.
5.4.3 Resource pool no. 3: Additional marketing capacity
Resource pool no.3 contains all costs related to additional marketing by sales expositions
and a contact person in Germany. Sales’ exposition costs are 50% of the costs named in
the financial statement of 2015 “foreign marketing, travelling and sales expositions”, the
rest of the foreign marketing costs are included in resource pool no.2, as they are due to
42
the booklet of the travel agency (Travel agency, 2006 b). The cost due to the contact
person in Germany is called in the travel agency´s financial statement “costs because of
direct sales in Germany”. We include 100% of this cost into resource pool no. 3, as can be
seen in table 9.
All sales expositions were purely directed at travelers who book directly, and not
directed at other travel agencies, as no business to business expositions were attended.
The marketing by the contact person is also directed at direct bookers, travelers that book
through another travel agency do not need assistance from the contact person in
Germany (G. Ingólfsdóttir, personal communication, 3rd of October 2016).
The travel agency doesn’t incur any cost for additional marketing to other travel
agencies. Foreign travel agencies who want to resell our travel agencies products either
know the owner of our travel agency for many years or approach our travel agency after
they were addressed through general marketing (G. Ingólfsdóttir, personal
communication, 3rd of October 2016).
Table 9. Resource pool no. 3.
In order to allocate the right percentage of salaries into resource pool 3, we need again
to consider how much worktime the travel agency’s staff spends for additional marketing
purposes. In 2015 the travel agency´s staff spent in total 37 workdays on six different
sales expositions. Three employees dedicated part of their workforce to sales expositions
and are therefore employees of resource no. 3. Two of them are managers of the travel
Cost ( according to financial statement 2015) Total amountAllocation
percentage
Allocated
amount
Foreign marketing, traveling and sales expositions 7.461.281 50% 3.730.641
Costs because of direct sales in Germany 995.004 100% 995.004
Salary and salary related expenses 65.187.882 2,2% 1.434.133
Staff's cafeteria 1.200.470 2,2% 26.410
Educational cost 489.048 2,2% 10.759
Annual staff's party 1.577.960 2,2% 34.715
Gifts and grants for the staff 174.146 2,2% 3.831
6.235.494
Resource pool no. 3: Additional marketing capacity
TOTAL
43
agency, one resource employee is a customer servicing employee (G. Ingólfsdóttir,
personal communication, 3rd of October 2016).
In column D table 10 we have expressed the workdays employees of the company
spent at sales expositions as a percentage of their workforce. By multiplying the resource
employees’ salaries (expressed as a percentage of total company´s salaries) with the
percentage of their personal worktime dedicated to resource 3, we calculate that 2,2% of
the company´s salary cost is caused by attending sales expositions (see column E of table
10).
Table 10. Worktime and salaries of resource no. 3.
In accordance to the percentage of company’s salaries dedicated to the resource we
allocate 2,2% of all salary costs and staff related expenses to resource pool no.3. This can
be seen in table 9. We do not include any facility costs into resource pool no.3 as
marketing abroad doesn’t consume office capacity at home at any significant scale. In
consequence, we do not need to calculate any percentage of company´s workhours
dedicated to resource no. 3, i.e. table 10 does not have a column F. Recall that for
resource no. 2 and 3 we need to calculate the percentage of customer servicing
employees’ worktime only to be able to allocate office facility.
5.4.4 Business sustaining costs
The total overhead costs of 2015 of the travel agency were 99.036.921 ISK, as can be seen
in table 11. In this figure travel guides salaries are not included. The financial statement
doesn´t list travel guides salaries separately, the company intern bookkeeping enables us
A B C D E
Resource-
employee no.
Employment
percentage (full-
time or part-time)
Percentage of
salary of all
salaries of the
travel agency
percentage of
personal worktime
dedicated to
resource 3
Percentage of
salary dedicated to
resource 3
=C*D
1 100% 14,7% 10% 1,5%
2 100% 13,6% 3% 0,4%
3 100% 10,5% 3% 0,3%
Total 300,0% 38,9% 16,0% 2,2%
44
though to deduct the travel guides salaries from the general salary cost (Travel agency,
2015 and Travel agency, 2015b). We don’t include travel guides’ salaries in overhead
costs, as they are part of the direct cost of group tours.
Of these 99.036.921 ISK can we allocate 70,5% or 69.816.173 ISK into resource pools,
see table 11. The overhead cost which is not allocated to resource pools is not related to
specific customers but sustains the business of the travel agency as a whole. According
to Kaplan and Cooper (1998) not specifically allocable overhead cost can be divided
arbitrary on all products or customers if pricing requires to allocate all cost on products
or customers. In our case, we do not need to take these general business sustaining costs
into account, as they do not have any meaning for the comparison of profitability of
different customer groups.
45
Table 11. Overhead costs allocated into resource pools.
5.5 Step 5: Establish source consumption rates
In step five of our TDABC system we link the in step three identified customer servicing
activities to the in step four formed resource pools. This is done by establishing rates, at
which the activities, that the resources perform, make demand on resource pools.
5.5.1 Resource no. 1: Travel agents’ capacity
The consumption of travel agents’ capacity by travel agents’ tasks performed for various
customers can be measured by time. The time-rates for almost all resource activities, i.e.
travel agents’ tasks, can be measured by counting the following three time-drivers.
Total salaries and salary related expenses 65.187.882
6.919.953 -
1.953.512
34.582.397
69.113
1.966.461
2.197.509
99.036.921
44.978.025
18.602.655
6.235.494
69.816.173
510.572
50.000
1.300.036
892.840
26.467.300
29.220.748
70,5%
TOTAL
TOTAL
Auditing costs
Banking costs
Not allocated salary, housing and other cost
Percentage of all overhead costs allocated to recource pools
Travel guides' salaries
Running facility costs
Sales and management costs
Depreciation on receivables
Depreciation on receivables
Interests and exchange rate costs
Resource pool no.1
Resource pool no.2
Resource pool no.3
Travel agency's licence fee
Meeting costs
TOTAL
Overhead costs (financial statement 2015)
Overhead costs allocated to resource pools
Business sustaining expenses
46
E-mails of travel agents
Booking lines in the sales software
Items in group packages
These time-drivers have a similar role as the cost drivers in the traditional ABC system.
They are the root cause of why cost occurs and assist therefore with allocation expenses
(Cooper and Kaplan, 1998). Time-drivers measure at what rate consumer servicing
activities consume resources time. In respect to cost drivers they are simpler to use as
the total number of time-drivers doesn´t need to be known. Moreover, several different
time-drivers can be simultaneously used to measure how various activities consume one
and the same resource (Kaplan and Anderson, 2007).
To establish time-rates, the TDABC system doesn’t require to observe scientifically
how activities are performed. Estimates of performance times are enough to be able to
allocate costs according to consumption of time (Kaplan and Anderson, 2004).
5.5.1.1 Time-driver no. 1: E-mails of the employees of resource no. 1
The time employed for many sub-activities that we introduced in step three under the
main activity booking with consulting, can be measured by e-mails. E-mails represent all
communication necessary to plan and sell a travel package. The more questions
customers have, or the more communication is needed to organize a trip, the more e-
mails have been exchanged between the customer and the travel agency. Each time
customers ask for a change of itinerary they receive an e-mail with a new itinerary
proposal. The more tailor made a trip is and the less it can be based on standard
itineraries, the more e-mails need to be exchanged.
E-mails can also be a time measure for sub-activities that fall under the main activity
called administration. E-mails measure how time intense the billing process is. Invoices
as well as collection reminders and payment confirmations are send by e-mail.
When measuring time spent to service a specific customer, we also include e-mails
which mention the customer’s name. In this way we can measure if special customer
service activity is needed for a specific customer, for example to solve problems like the
recuperation of lost baggage or service complains.
47
The average time travel agents need for all the activities they have to perform to be
able to send one e-mail, is 15 minutes. These 15 minutes are not only simply the time it
takes to write the e-mail, but include also all other travel agent’s activities that are
necessary to generate the information send in an e-mail (A. Steinbrenner, personal
communication, 14th of October 2016). This is an estimation based on the experience of
the travel agents, Kaplan and Anderson (2004) mention that time rates should be
estimated, not experimentally observed.
As explained, one e-mail can represent all kind of booking with consulting and
administration activities, i.e. travel agents’ activities. Therefore, we can say that the
resource consumption rate for travel agents´ activities that involve sending e-mails is 15
minutes per e-mail. This resource consumption rate is illustrated in table 12.
5.5.1.2 Time-driver no. 2: Booking lines in sales software
The resource time consumption of other sub-activities that fall under the main activities
booking with consulting and administration, i.e. travel agents’ activities, can be measured
for individual package by booking lines in the sales software. Booking lines as shown in
figure 1 represent all work necessary to organize a trip for individual travelers, i.e.
customers of group 3 and 4. Each booking line represents an item of a package deal that
needs to be planned, booked and administrated. The more items a package contains, the
more options need to be checked, the longer travel descriptions and more vouchers need
to be prepared and the more incoming invoiced need to be checked and paid for.
In praxis travel agents often use previously assembled text elements which help them
plan and describe an individual trip quicker. These description of travel items are time
intense to write in the first place and need to be updated continually. Moreover, travel
agents register prices into the booking software for the most frequently booked
accommodations in the preparation of each year. This preparative work facilitates the
booking process but signifies previous consumption of resource time. In the resource
consumption rate, that is measured by booking lines, is an average time for description
of the items included. For accommodations booked frequently preparative work can be
used many times, so that the relative time consumption per booking of the
accommodation is less than average. This is compensated by the fact that the description
48
of new, not previously described items in a booking package consumes much more
resource time than average.
As can be seen in figure 1, the sales software creates every time a line, when agents
request to book a hotel, no matter if the hotel is actually booked or not. Namely, not
every requested hotel is actually booked, because hotels deny booking request, if they
don´t have capacity. Therefore, measures the number of booking lines in the sales
software also the time which was employed to check on accommodations that were
already fully booked. Booking lines which do not lead to successful bookings don’t
represent travel documents or invoices, i.e. they stand for less administration time. This
is offset by the fact that they represent more communication time than successful
booking lines. Personal notes of travel agents show, that travel agents check availability
of accommodations directly by phone when the booking request through the system are
frequently denied. In this sense system lines because of denied booking requests are as
resource consuming as successful booking lines (A. Steinbrenner, personal
communication, 14th of October 2016).
Between planning, booking and administration the average amount of time of travel
agents’ capacity related to one booking line is 9 minutes (A. Steinbrenner and S.A.R.
Roloff, personal communication 13th of October 2016).
The resource rate for travel agents’ activities related to booked items in an individual
package is therefore 9 minutes per booking line in the sales software.
49
Figure 1. Booking lines in the sales software.
5.5.1.3 Time-driver no. 3: Items in group trips
Group trips are not booked through the booking software but through direct
communication between the hotels and other service providers of a group package and
the travel agency. Therefore, for group travelers, i.e. customer group 1 and 2, the
resource time consumption of travel agents’ activities that are not related to sending e-
mails is measured by items in a travel package, not by booking lines in the sales software.
Every single item in a group travel package needs to be planned, booked and carefully
reviewed, to insure that a group trip functions properly. Every item is also described in
travel documents for the customer. These descriptions are though less detailed than
descriptions of individual packages, as group tours are guided and standardized.
The organization, booking and administration of each element of a group package
takes about 45 minutes (G. Ingólfsdóttir, personal communication, 19th of October,
2016).
When calculating time consumption per traveler we need to keep in mind that all
services of a group package are used by all members of one travel group. The resource
consumption rate for travel agents’ activities related to items in a group package is
50
therefore 45 minutes for each item in a group package divided by the number of group
traveler units of a group.
Table 12. Resource consumption rates.
Resource consumption rates
Resource number
Resource activities
Consumption measurement
Drivers to estimate
time/ fraction
Minutes / fraction per
driver
1
Travel agents’ activities related to sending
emails
Minutes of resource time
E-mails
15
1
Travel agents’ activities related to items in an
individual travel package
Minutes of
resource time
Booking lines
9
1
Travel agents’ activities
related to items in a group travel package
Minutes of
resource time
Items in a group package divided by
number of customer units in the travel
group
45
2
General marketing
Fraction of
capacity
Customer booking through foreign travel
agency
1/2746
2
General marketing
Fraction of capacity
Customer booking directly
5/2746
3
Additional marketing
Fraction of capacity
Customer booking directly
1/536
5.5.1.4 Unmeasured resource activity
With the three time-drivers presented we can estimate the resource time employed for
all travel agents’ activities, except the time spent to answer emergency calls of customers
who need assistance during their time in Iceland. Emergency calls are answered orally
and vary a lot in their complexity. There is no documentation available about emergency
assistance in 2015. In total this activity consumes comparatively little amount of the
travel agents’ resource. According to estimates only 12 workhours a year are employed
for it (S.A.R. Roloff, personal communication, 4th of October 2016). Moreover, company
51
intern documentation shows, that all customer groups can use resource time for this
issue (Travel agency, 2014). We exclude this activity from cost calculation, as it is minor
and doesn’t have traceably more impact on specific customer groups.
5.5.2 Resource no. 2: General marketing capacity
The resource consumption rate of general marketing activities depends on the customer
groups these marketing activities are directed at. In other words, the consumption of
general marketing capacity of different customers depends on whether the customers
book through a foreign travel agency, i.e. belong to customer group 1, or book directly at
our travel agency, i.e. belong to customer group 2, 3 or 4.
We assume that travel agencies and individuals who are directly addressed by general
marketing activities consume the general marketing capacity in equal proportions.
Foreign travel agencies that are once addressed by general marketing, sell in average to
five traveler units a year (A. Steinbrenner, personal communication, 7th of October 2016).
Those five customers, that are buying through one foreign travel agency don’t consume
any general marketing capacity directly. They only consume indirectly a fraction of the
marketing capacity the foreign travel agency that sells to them consumed previously. In
essence consume customers of group 1 only one fifth of the resource capacity other
customers consume.
As can be seen in column B of table 13 the travel agency sold during the year 2015 a
total of 368 individual packages and 468 group travelers’ spaces. I.e. 368 trips were sold
to customers of group 1 and 2 and 468 trips were sold to customers of group 3 and 4.
Group travelers travel in average in subgroups of two travelers (E.Ö. Sigurjónsson,
personal communication, 22nd of September 2016). Therefore, we consider the 468
group travelers as 234 customer units and calculate in column C of table 13 that the travel
agency serviced in 2015 a total of 602 customer units. We allocate marketing capacity to
customer units, not single customers, as we assume that one key member of each
decision-making unit must be convinced in marketing (Jobber and Fahy, 2009).
52
Table 13. Consumption of resource no. 2.
Company intern documentation (Travel agency, 2016 b) states, that 11% of all
turnover in 2015 was generated by sales through other travel agencies. As we don’t have
any other data available, we use turnover percentages to calculate the number of
customer units that booked through foreign travel agencies. As shown in column D of
table 13, 11% of 602 customer units booked through foreign travel agencies. This means,
66 customer units of the total 602 customer units belong to customer group 1. The
remaining 536 customer units booked directly at our travel agency, i.e. they belong to
customer group 2, 3 or 4.
As explained earlier and illustrated in column E of table 13, customers of group 2, 3
and 4 consume each five times more of the resource each customer of customer group 1
consumes. In order to be able to allocate to each customer unit a fraction of general
marketing resource according to the in column E established relative resource
consumption, divide we the general marketing capacity into 2746 equal parts, see column
F of table 13. This enables us to divide the resource among all customers in a way that
allocates 5 times more parts to direct bookers, i.e. customers of group 2 to 4, than to
customers of group 1, see column G of table 13.
The resource consumption rate for general marketing therefore is 1/2746 of the total
resource for customers which book through travel agencies and 5/2746 of the total
resource for customers which book directly. This is illustrated in table 12.
A B C D E F G
Customer
groupsold trips
Customer units
with units of 2
group travelers
Customer units
according to
turnover
Relative resource
consumption per
customer unit
Relative resource
consumption per
customer group
Resource
consumption rate
per customer unit
=D*E =E/sum (F)
1 602*11%=66 1 66 1/2746
2
3
4
TOTAL 836 602 602 6 2746 6/2746
5/27462680
468
368
468/2=234
368536 5
53
5.5.3 Resource no. 3: Additional marketing capacity
Additional marketing activities, i.e. sales exposition marketing and marketing through a
contact person in Germany, are exclusively directed at direct bookers. Therefore,
resource no. 3 is only consumed by customers of group 2, 3 and 4.
All 536 costumer units who book directly consume additional marketing capacity in equal
parts. Customers who book through foreign travel agencies don’t consume any additional
marketing capacity. We divide the additional marketing capacity in 536 equal parts, each
customer of group 2, 3 and 4 consumes one of these 536 parts.
The resource consumption rate for additional marketing therefore is 1/536 of the total
resource for customers which book directly.
5.6 Step 6: Calculating costs according to effective use of capacity
Step six of the TDABC system calculates the total cost of customers of the travel agency.
In order to determine the total cost of each customer of our sample we need to add their
indirect cost to their direct cost, that we listed up in step two.
The indirect cost of each customer is the sum of the cost due to his consumption of all
resources of the travel agency. Therefore, we need to calculate what cost the in step five
established resource consumption rates signify for the travel agency. As consumption of
resource no. 1 is measured in minutes, we need to calculate how much one minute of
resource no. 1 costs. For resource no.2 and 3 we need to calculate how much one fraction
of the resource costs.
Once established resource consumption costs per minute or fraction of resource
capacity, we multiply this cost with the amount of minutes or fractions of resource
capacity a customer uses to calculate the indirect cost caused by his consumption of a
specific resource.
5.6.1 Cost per minute of effective capacity of resource no. 1
Kaplan and Anderson (2004) emphasize that it is important to divide the total cost of a
resource through the effective capacity in minutes of the resource, when calculating the
resource cost per minute. Other than the theoretic capacity of a resource, the effective
capacity is the amount of time the employees of the resource are productively working.
54
Time spent for breaks and other unproductive activities needs to be deducted from the
total amount of time employees are present at work, when calculating the effective time
capacity of a resource.
According to the collective agreement the fulltime employees of the travel agency
work 37 hours a week. In this amount is one 15 minutes break a day included, so that
fulltime employees are 35 hours and 45 minutes a week at their workplace (VR, 2016).
The weeks worked a year in Icelandic offices are 43,8. The number of 43,8 weeks is
obtained by deducting 24 days of vacation (VR, 2016) and 17 public holidays (Lög um
helgidagafrið no. 32/1997) from 52 calendar weeks. An employee who works 35 hours
and 45 minutes for 43,8 weeks a year, works in total 1566 hours a year. This means that
a 100% employed travel agent should be theoretically 1566 hours at work a year.
In column D of the table 14 we calculate the theoretic workhours dedicated to
resource no. 1 by multiplying each resource employee’s employment percentage with
the percentage of worktime he dedicates to resource no. 1 and the 1566 annual theoretic
workhours of a fulltime employee.
Table 14. Effective workhours of resource no.1.
The average absence because of sickness and personal errands during paid worktime
is 110 hours a year. Employees spent about 80% of their worktime productively (E.
Sigmundsdóttir, personal communication, 13th of October 2016). According to this we
A B C D E
Resource-
employee
no.
Employment
percentage
(full-time or
part-time
employee)
Percentage of
personal
worktime
dedicated to
resource 1
Theoretic
workhours
dedicated to
resource 1
Effective
workhours
dedicated to
resource 1
B C 1566*B*C (1566-110*C)*80%
1 100% 65% 1.018 757
2 100% 90% 1.409 1.048
3 100% 100% 1.566 1.165
4 100% 100% 1.566 1.165
5 80% 100% 1.253 914
6 80% 100% 1.253 914
TOTAL 560,0% 555,0% 8.065 5.964
55
calculate in column E of table 14 the effective workhours each employee of resource no.
1 dedicates to the resource. We deduct from each agent’s theoretic workhours an
average absence and multiply the result with 80%., i.e. the percentage of worktime spent
productively. As mentioned before the average absence of an employee is 110 hours a
year. This absence has though less effect on the workhours of resource no. 1, if the
employee doesn’t spend all his worktime for the resource. Therefore, we do not simply
deduct 110 hours from the theoretic workhours of each employee but deduct the product
of 110 hours and the percentage of personal worktime dedicated to resource no. 1. As a
result of these calculations we learn that the effective capacity of resource no. 1 is in total
5964 workhours, see column E of table 14.
In step four of our TDABC system we calculated that the total cost of resource no. 1 is
44.978.025 ISK. The resource has an effective capacity of 5964 workhours or 357.840
minutes. This leads to a cost per minute of effective resource capacity of 126 ISK, as can
be seen in table 15.
Table 15. Cost per minute of resource no. 1.
5.6.2 Travel agents’ capacity cost for a customer unit
In order to establish the cost caused by a customer unit because of its use of resource no.
1, we need to calculate how many resource minutes it consumes and multiply these
minutes with the cost per minute of resource time. Table 16 illustrates how a specific
costumer´s use of time-drivers can be translated into use of resource time and
consumption of resource capacity. This table needs to be filled out separately for each
customer unit whose profitability shall be analyzed. Recall that in order to be able to
compare group tourists and individual packages, we analyze customers in units. Group
Total cost of resource no.1 44.978.025
Effective capacity of resource in hours 5.964
Effective capacity of resource in minutes 357.840
Cost per minute of resource time 126 ISK
Resource no.1 : Travel agents' capacity
56
travelers, who book together are considered as one customer unit, as well as all members
of the same individual package are one customer unit.
Table 16. Calculation of customer’s consumption of resource no. 1
For each customer analyzed we need to count the amount of time-drivers he uses and
record the results of our count in column C of table 16. A customer’s total consumption
of resource time can then be easily calculated by multiplying the number of time-drivers
he uses with the number of minutes a time-driver represents, see column D of table 16.
Once established a customer’s use of resource time, we can calculate his specific resource
consumption cost. To do so we multiply a customer unit´s total use of resource minutes
with the cost per minute of resource time, i.e. 126 ISK. Thus, the sum of column E of table
16 expresses the total cost of a customer unit in accordance to its specific use of time-
drivers.
When counting time-drivers, we consider for group travelers the number of items in a
package and for individual travelers the number of their booking lines, this concept has
been explained in step five. Moreover, we need to divide the total number of items in a
group package by the number of customer units traveling in that group. This is due to the
fact, that all customers traveling in the same travel group consume a share of the
A B C D E F
Count for each
customer=B*C
=D*Cost of
resource-minute
Emails 15 COUNT =D*126
Applies to all
customer
groups
Booking lines 9 COUNT =D*126
Applies to
customer
group 3 and 4
Items in a
group package45
COUNT divided
by number of
customer units in
travel group
=D*126
Applies to
customer
group 1 and 2
=sum(E')TOTAL COST BECAUSE OF CONSUMPTION OF RESOURCE NO. 1
Drivers to
estimate time
Minutes per
time-driver
Resource no. 1: Travel agents' capacity
Minutes of
resource time
consumed
Number of time-
drivers
Cost of the
customer unitExplanation
57
resource related to one item of the package. In other words, all customer units of a travel
group benefit equally of the 45 minutes employed to organize one item in their group
package, as they all use this item.
5.6.3 Marketing cost for a customer unit
In a more complex setup we would now count how many fractions each customer uses
of marketing resources. The marketing cost for a specific customer would be calculated
by multiplying the number of fractions he uses with the cost per fraction of marketing
resources.
In our case all customers of the same customer group use a fixed amount of fractions
of marketing resources. As explained in step five each direct booking customer unit uses
5 of 2746 parts of resource no. 2, i.e. general marketing capacity, and 1 of 536 parts of
resource no.3, i.e. additional marketing capacity. In other words, each customer unit of
group 2, 3 or 4 uses always 0,18% of resource no. 2 and 0,19% of resource no. 3. This is
illustrated in column D and E of table 17. Customers of group 1 use each 1 of 2746 parts
of resource no. 2, i.e. 0,04%. Besides this they do not use any fraction of resource no. 3,
i.e. 0%.
Therefore, we can directly calculate a fixed cost because of general and additional
marketing for each customer, according to which group he belongs to. In column F of
table 17 we multiply the total cost of each marketing resource with the fraction of these
resources used by the customer units of specific customer groups. As a result, we find out
that marketing to each customer unit of group 1 costs 6.774 ISK. Each costumer unit that
belongs to group 2, 3 or 4 causes 45.506 ISK in marketing costs.
Table 17. Marketing cost per customer unit.
A B C D E F
Total cost of
resource 2
Total cost of
resource 3
Fraction used of
resource 2
Fraction used
of resource 3
Marketing cost
per customer-
unit
=B*D+C*E
Customer group 1 0,04% 0% 6.774
Customer group 2, 3 or 4 0,18% 0,19% 45.506 18.602.655 6.235.494
Resource no. 2 and no.3: General and additional marketing
58
5.6.4 Total costs of the customer groups of our sample
The exact amount of time-drivers of each customer unit of the sample is listed up in
appendix 1. This count of time-drivers enables us to calculate each customer’s use of
resource no. 1 with the method we illustrated in table 16. In appendix 1, we also list the
specific cost of each costumer of the sample because of consumption of resource no. 2
and no. 3. Finally the total indirect cost of each customer is added to his direct cost, so
that appendix 1 shows a list of the total cost of all customer units of the sample. On the
basis of the cost list shown in appendix 1 we calculate the average indirect and direct
costs of each customer group. The average indirect and direct cost of all customer groups
is illustrated in table 18.
The average indirect cost of our customer groups is not proportional to their average
direct cost. Table 18 shows that the average indirect cost of our sample customers is less
for group travelers, i.e. customer group 1 and 2, than for individual travelers of customer
group 3. In contrary to this the group travelers direct cost is more than the direct cost of
customers of group 3. A similar disproportion between direct and indirect cost can be
observed between customers of group 1 and 2. The average indirect cost of group
travelers who book through foreign travel agencies is less than for group travelers who
book directly. The direct cost of the former is though lower than the direct cost of the
latter.
Table 18. Average cost of the customer groups.
5.7 Step 7: Calculating profitability
In step 7 of the TDABC system we calculate the profit of each customer unit by subtracting
its total cost from its revenue. In order to compare the profitability of customer units and
travel packages of different sizes we calculate the markup percentage on costs for all
customers of the sample, see Appendix 1. Moreover, we calculate the markup percentage
Customer group
no.
Average direct
cost
Average indirect
cost
Average total
cost1 559.850 ISK 12.304 ISK 572.154 ISK
2 459.567 ISK 25.392 ISK 484.959 ISK
3 361.212 ISK 41.244 ISK 402.456 ISK
4 658.454 ISK 48.040 ISK 706.494 ISK
Average cost of customer groups
59
on direct costs of all customers of the sample to be able to compare profitability with
TDABC and with traditional costing.
Table 19 illustrates the profitability of customer units of our sample when markup on
total costs is calculated with TDABC. For comparison purposes we show also the sample
customer profitability simply measured in markup on direct costs. According to these
sample customers, profitability of customers is clearly subjected to their specific
consumption of the travel agency´s resources. The customers who seem to be equally
profitable when only considering direct costs vary a lot in their profitability when
considering direct and indirect costs. The markup on direct costs and markup on total
costs calculated with TDABC are not proportional to each other.
When considering indirect costs due to the specific consumption of companies
resources by specific customers, profitability is much lower than when considering only
direct costs. Some customers of group 3 and 4, i.e. individual package travelers, even
make the company lose money, as they have negative profitability. Customers with low
profitability percentages can be regarded as well as unprofitable as the TDABC system
links only about 70% of all indirect costs of the financial statement of 2015 to specific
customers.
60
Table 19. Profitability of the customers of the sample.
Besides the information we generated with TDABC it is also interesting to see, that the
markup on direct cost of our customer sample varies considerably between individual
customer units, especially for customers of group 3 and 4. Any simple customer
profitability analysis that considers direct costs could have shown this, but as the travel
Costumer
unit no.
Markup on
direct costs
Markup on total
costs calculated
with TDABC
Costumer
unit no.
Markup on direct
costs
Markup on total
costs calculated
with TDABC
1 10,2% 7,2% 1 22,4% 12,3%
2 10,2% 7,2% 2 22,4% 1,5%
3 12,6% 9,6% 3 22,4% 10,2%
4 10,2% 7,2% 4 53,1% 29,2%
5 12,4% 9,4% 5 53,1% 23,1%
6 12,4% 9,4% 6 53,1% 29,2%
7 12,4% 9,4% 7 32,1% 14,8%
8 40,7% 33,3% 8 32,1% 15,2%
9 18,9% 16,5% 9 32,1% 11,9%
10 50,5% 38,0% 10 34,8% 17,6%
11 21,3% 16,5%
12 21,3% 16,5%
13 54,6% 42,9%
14 21,3% 16,5%
15 21,3% 16,1%
Costumer
unit no.
Markup on
direct costs
Markup on total
costs calculated
with TDABC
Costumer
unit no.
Markup on direct
costs
Markup on total
costs calculated
with TDABC
1 28,7% 0,4% 1 23,2% 11,8%
2 39,5% 17,5% 2 36,6% 26,6%
3 65,0% 16,8% 3 49,3% 24,7%
4 29,9% 13,5% 4 25,1% 9,9%
5 56,8% 14,2% 5 32,3% 12,7%
6 40,7% 17,2% 6 61,9% 45,9%
7 16,9% -5,9% 7 28,0% 9,8%
8 29,2% -2,8% 8 18,5% -2,9%
9 38,9% 13,6% 9 67,6% 36,5%
10 23,8% 3,9%
11 49,4% 34,3%
Customer sample
Customer group 3 Customer group 4
Customer group 1 Customer group 2
61
agency has so far not engaged in CPA, this information is a valuable side product of our
CPA with TDABC.
Our sample is not statistically representative for all customers of the travel agency.
Nevertheless, the average markup of different customer groups shows, that we cannot
really evaluate the profitability of customer groups without considering indirect costs.
The average markup of customer groups on direct costs is compared to customer groups’
average markup on direct and indirect costs calculated with TDABC in table 20.
The customer group’s average markup on direct cost is similar for all customers who
book directly, i.e. customer group 2, 3 and 4, and lower for customers who book through
travel agencies, i.e. customer group 1. This result is not surprising, as the company’s
pricing is based on markup on direct costs. As foreign travel agencies charge commissions,
the markup on direct costs decreases when trips are not sold directly. If we consider
though indirect costs, we get a different picture of the profitability of different customer
groups of our sample. Under TDABC the markup on total costs is similar for all group
travelers, no matter if commissions are paid to foreign travel agencies or not.
Table 20. Average profitability of customer groups.
The average profitability of individual travelers is as well subjected to indirect costs.
The markup on direct costs of our sample customers doesn´t differ according to when
individual travelers booked their packages. If we calculate the cost of the customers of
our sample with TDABC, individual travelers who book with shorter notice, i.e. after
February, are on average less profitable.
Customer GroupAverage markup on
costs with TBABC
Average markup on
direct costs
1 17,1% 22,0%
2 16,5% 35,8%
3 9,4% 38,4%
4 19,4% 37,8%
Average markup on costs
62
6 Discussion of the results and benefits of the TDABC system
6.1 Comparison of profitability of customer groups
The TDABC system provides cost information that enables the travel agency to compare
different customer groups and review whether its costumer mix can be improved. There
is no evidence from our sample, that group travelers or individual travelers as a whole
are more or less profitable. Therefore, the company should continue to address both,
group traveler and individual travelers. Our sample shows though that profit can differ
between different customer groups of individual travelers and group travelers. This
information enables the company to react in profit improving ways.
Group travelers book directly and indirectly. The owners of the travel agency were
wondering, whether it is feasible to pay commissions to foreign travel agencies to resell
their products. Profitability calculations that are only based on the markup on direct
costs, indicate that the profitability is less of those customers who book indirectly through
foreign travel agencies. These calculation omits though the role of indirect costs and is
therefore an insufficient decision tool for the managers. Our customer profitability
analysis with TDABC shows that customers who book through foreign travel agencies are
as profitable as direct customers. The commissions paid to other travel agencies should
therefore not stop our travel agency from selling indirectly.
Individual travelers book either before March or after February. The TDABC of the
sample customers reveals that profitability varies according to when customers book.
This information profitability analysis by markup on direct costs cannot generate. The
TDABC takes the greater resource consumption of customers who book with shorter
notice into consideration and shows that profits of the sample customers are lower when
they book with shorter notice. It is important for the managers to be aware that
profitability varies in this way. They can use this information to try to increase the number
of customers that book early, for example by addressing this group with special
marketing.
6.2 Pricing according to TDABC
Customer profitability analysis by TDABC can be used for pricing decisions. The sample
we took to illustrate how the TDABC system works, is though too small to make exact
63
pricing decisions from its results. Small samples with a high variance result in a wide
confidence interval for the population mean, so that results are little significant
(Newbold, Carlson and Thorne, 2010).
With the TDABC system we installed the travel agency could easily collect profitability
information for all customers. The only information travel agents would have to record
during the booking process would be, how many e-mails they send and how many lines
they booked or how many items a travel package contained. In essence could they fill out
table 16 for every customer they service, while the service is provided. It would then be
possible to compare the profitability of all customers of one customer group with the
profitability of all customers of another customer group and adjust pricing to specific
groups according to it.
A diverse pricing to different customer groups according to their real cost, would have
the benefit, that more profitable customer groups wouldn´t have to subsidize less
profitable customer segments (Cooper and Kaplan, 1991). Prices to the most profitable
customer groups could be lowered, for example with bigger discounts for customers who
book before March. In this way profitable customer groups might be increased as the
travel agency’s offer become more price competitive for them. As we analyzed in chapter
4.1 the market segment of the travel agency is particularly price sensitive. Competitive
pricing is therefore very important.
If the prices for less profitable customer groups were augmented, currently
unprofitable customers who accept these higher prices would become more profitable,
as they would pay according to their higher cost. As Drucker (1995) points out, the travel
agency should not be afraid to loose price sensitive unprofitable customers. It should be
positive to loose unprofitable customers and new price-sensitive profitable customer
might fill the capacity again. Besides this all expenses are in the long run variable, so that
capacity can be adjusted to the amount of profitable customers.
In addition, cost-adjusted pricing policy does not necessary terminate currently
unprofitable customer relations. Customers’ behavior can be influenced in a profit
increasing way (Cooper and Kaplan, 1991). Diverse pricing could influence the booking
behavior of customers, for example make them book earlier or promote the use of
foreign travel agencies.
64
6.3 Managing the profitability of specific customers
The TDABC analysis of the customers of our sample showed also that profitability varies
not only between customer groups but also between specific customers of the same
group. This is due to variations of revenue and direct and indirect costs among customers.
Variation of the markup on direct costs due to imprecise pricing forecast could be
limited by stopping to promise a fixed price for a not yet booked travel package. Quoting
a price range in the first travel package offer would allow to adjust prices according to
variations in direct costs. Moreover, variations in direct costs, that are due to changing
sizes of travel groups, could be limited by ensuring the sale of all spaces of a travel group.
Special offers and increased marketing efforts for unsold spaces in group trips would be
a tool for this.
Variations of the markup on indirect costs due to different consumption of travel
agents’ capacity could be limited by rationalizing travel agents´ activities. If travel agents
calculated indirect cost of specific customers as the service evolves, they could
immediately reduce their service when customers would start to be unprofitable
according to TDABC. For example, communication and modification of travel proposals
could be limited when the time consumption measured by e-mails would exceed the
limits of profitability. If the time consumption measured by booking lines exceeded
profitability limits, complexity of travel packages could be limited. In this way the
profitability of specific customers could be managed and operation structures could be
modified to reduces costs. Cooper and Kaplan (1991) emphasize that activity-based
costing should not only be used for pricing but also for process improving that minimizes
resource consumption.
6.4 General use of TDABC information
Besides CPA provides TDABC information which could be generally valuable for the
management. For example, the relative high cost of additional marketing for specific
customer groups could be taken into consideration when reviewing processes. Managers
could critically review if the benefit of the additional marketing activities like the
attendance of sales expositions justifies additional marketing activities’ costs.
It is also important to be aware of the cost per minute of the travel agents’ capacity.
Only about 30% of all customers who contact the travel agents for a travel proposal
65
actually book a travel package (A. Steinbrenner, personal communication, 21st of October
2016). Knowing the cost per minute of travel agents’ capacity, it is possible to calculate
how much these non-profit generating customer contacts cost the company, for example
by counting the e-mails sent to them. This cost could be covered by charging potential
customers a service-fee for a travel proposal, which would be refunded if the proposal
was actually booked.
It might also be interesting to analyze how big the percentage of travel agents’ capacity
is, that is not used to service actual customers. By counting all time-drivers used for
customers, it would be possible to determine the total amount of resource time spent to
service paying customers. If servicing customers does not occupy the complete practical
resource time, it must be concluded that the remaining practical resource time is not used
for profit generating customer service. One possible explanation for non-profit
generating use of resource time could again be travel proposals which don’t lead to any
sale. Another explanation might be that the resource capacity is too big in relation to the
number of customers available. In any case a better understanding of the consumption
of the travel agents’ capacity would help to review business processes and minimize the
amount of travel agents’ capacity that is spent on none generating income.
66
7 Conclusion
The installation of a TDABC system in the travel agency of our case study has shown that
time-driven activity-based costing is a useful and practicable approach for customer
profitability analysis in Icelandic travel agencies.
The results generated by TDABC allow to evaluate customer profitability in a much
more precise way than simple profitability calculation based on the markup on direct
costs. TDABC accounts for direct and indirect costs of customers. Traditional profitability
analysis by markup on direct costs cannot account for the indirect costs associated with
more or less extended use of companies’ resources by different customers. In order to
be able to evaluate the effect on profitability of commissions paid to other travel
agencies, we need to consider indirect costs. Indirect costs matter as well, when we want
to evaluate profitability according to when and how customers book.
For the customers of our case study the profitability based on the markup on total
costs, calculated with TDABC, is not proportional to the profitability calculated by a simple
markup on direct costs. Therefore, when analyzing the profitability of the customers in
the case, it is not possible to correctly estimate the markup on total costs on the basis of
the markup on direct costs. We have no reason to believe that the findings of this case
study cannot be generalized for other travel agencies on the same market. All companies
on the market who sell similar products face the same conditions. Namely they face the
same variable customer behavior and similar company inherent processes, that cause
indirect cost to vary among customers and to be unproportioned to direct costs.
A precise customer profitability analysis which divides customers into groups, like the
TDABC system we installed in this study, proved to be a good tool to enhance profitability.
On the Icelandic travel agency market, we considered, resources are limited and
competition is high. The customer profitability analysis by TDABC conducted in the case
study provided the company with the necessary information to succeed in such an
environment. It is highly likely that similar companies would benefit in a similar way. CPA
by TDABC helps travel agencies to understand the structure and the profitability of their
customers. In this way they are enabled to price competitively and address the right
customers. Moreover, TDABC shows how different customer groups consume resources.
67
This is a necessary information for reviewing process in a way that limits resource
consumption and maximize profits.
The study showed that companies, who don’t currently engage in any profound
customer profitability analysis (CPA), like the travel agency of our case, benefit from
starting CPA by TDABC, as they get a more differentiated and accurate picture of their
customers’ costs. Travel agencies who already engage in CPA can use TDABC to review if
the costing of different customer groups is correct. Moreover, CPA by TDABC can enable
them to analyze why different customer groups are more or less profitable. As evidenced
by the case study TDABC can provide information that can be used to improve processes
and influence customers’ behavior in a way that currently unprofitable customer groups
become profitable.
The installation of a TDABC system in the travel agency of the case proved to be quite
time consuming, as a lot of information about the work process in the company needed
to be collected. It was though possible to develop a system which measures the resource
consumption of specific customers in a simple way. Customer servicing processes are
similar in all travel agencies that use modern computer systems. Therefore, the basic
TDABC system developed in this study should be adaptable to other travel agencies. Semi-
structured interviews proved to be a good tool to understand the company´s activities
well enough to divide costs into resource pools and define resource consumption rates.
The study showed that the operation of a TDABC system is feasible for small
companies, like the typical Icelandic travel agency, if time-drivers are counted during the
customer servicing process. A complete TDABC analysis of all customers of an Icelandic
travel agency is though only realistic, if data is collected simultaneously. Data collection
afterwards proved to be time intense as it required a lot of manual work. Analyzing a
customer sample whose service is already completed proved to be a good starting point
to compare the profitability of different customer groups and establish fields for further
analysis.
With this study we could validate for Icelandic travel agencies the theory of Kaplan and
Anderson, that TDABC is a practicable approach for CPA in the service industry. Our study
showed that international case study results in tourism, like the study by Dalci, I., Tanis,
V. and Kosan, L. (2010) in a Turkish hotel can be confirmed by study results in the Icelandic
68
tourism. In order to be completely able to evaluate the value of the TDABC system
designed in this study, it would be useful to conduct a 12-month long case study in the
travel agency and test TDABC of all customers of a whole year. Further research would
also be desirable in other travel agencies to test how work intense the adaptation of the
developed TDABC system is.
It is likely that costumer profitability analysis will become increasingly important for
Icelandic travel agencies, as capacity in the Icelandic tourism is reaching is limits and
competition increases. Time-driven activity-based costing is a feasible and effective tool
for CPA. We might see in future that travel agencies realize the advantages of being able
to allocate direct and indirect cost to specific customers, so that they take up TDABC for
CPA.
69
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Appendix
Appendix 1. Direct costs, indirect resource costs and time-driver of the sample.
AB
CD
EF
GH
IJ
KL
M
NO
Cu
stom
er
grou
p
Cu
stom
er
No
.
Dire
ct cost
paid
to h
ote
ls
etc.
Min
ute
s
use
d o
f
reso
urce
1
Co
st
reso
urce
1
Co
st
reso
urce
2
and
3
Total co
st of
the
custo
me
r
un
it
Sales re
ven
ue
of
the
custo
me
r
un
it
Pro
fit from
custo
me
r
un
it
Marku
p o
n
costs w
ith
TBA
BC
Marku
p o
n
dire
ct costs
Bo
okin
g
line
s/Item
sEm
ailsN
ame
PA
X
=L*9 or
45+M*15
=D*126
=IF(A=1;67
74;45506)=E+F
=G-H
=H/G
-1=H
/C-1
see
step
2 of
TDA
BC
see
table
17
11
710.674 ISK
10212.825 ISK
6.774 ISK730.273 ISK
783.081 ISK
52.808 ISK7,2%
10,2%1,9
1H
elene G
azzi2
12
710.674 ISK
10212.825 ISK
6.774 ISK730.273 ISK
783.081 ISK
52.808 ISK7,2%
10,2%1,9
1M
arlis Merz
2
13
710.674 ISK
10212.825 ISK
6.774 ISK730.273 ISK
800.483 ISK
70.210 ISK9,6%
12,6%1,9
1H
ans-C
hristian
Web
er2
14
710.674 ISK
10212.825 ISK
6.774 ISK730.273 ISK
783.081 ISK
52.808 ISK7,2%
10,2%1,9
1M
argrit S
chrö
ter2
15
710.674 ISK
10212.825 ISK
6.774 ISK730.273 ISK
798.795 ISK
68.522 ISK9,4%
12,4%1,9
1Sylk
e Kaija R
ud
olp
h2
16
710.674 ISK
10212.825 ISK
6.774 ISK730.273 ISK
798.795 ISK
68.522 ISK9,4%
12,4%1,9
1T
orsten
Osterm
eier2
17
710.674 ISK
10212.825 ISK
6.774 ISK730.273 ISK
798.795 ISK
68.522 ISK9,4%
12,4%1,9
1M
aria Glaser
2
18
355.337 ISK
10212.825 ISK
6.774 ISK374.936 ISK
499.793 ISK
124.857 ISK33,3%
40,7%1,9
1In
es Hild
ebran
dt
11
9876.485 ISK
89
11.168 ISK6.774 ISK
894.428 ISK1.042.362 ISK
147.934 ISK
16,5%18,9%
1,61
Bern
d W
erner R
iedel
4
110
219.121 ISK
10413.058 ISK
6.774 ISK238.954 ISK
329.849 ISK
90.895 ISK38,0%
50,5%1,6
2W
olfg
ang S
tenzel
1
111
438.243 ISK
8911.168 ISK
6.774 ISK456.185 ISK
531.657 ISK
75.472 ISK16,5%
21,3%1,6
1Sara H
albig
2
112
438.243 ISK
8911.168 ISK
6.774 ISK456.185 ISK
531.657 ISK
75.472 ISK16,5%
21,3%1,6
1A
nna P
etersen2
113
219.121 ISK
8911.168 ISK
6.774 ISK237.064 ISK
338.666 ISK
101.602 ISK42,9%
54,6%1,6
1H
eidi H
aberl
1
114
438.243 ISK
8911.168 ISK
6.774 ISK456.185 ISK
531.657 ISK
75.472 ISK16,5%
21,3%1,6
1D
agm
ar Deh
ling
2
115
438.243 ISK
10413.058 ISK
6.774 ISK458.075 ISK
531.788 ISK
73.713 ISK16,1%
21,3%1,6
2M
artin S
chuhm
acher
2
21
710.674 ISK
14718.495 ISK
45.506 ISK774.675 ISK
870.090 ISK
95.415 ISK12,3%
22,4%1,9
4R
alf Guetler
2
22
355.337 ISK
22227.945 ISK
45.506 ISK428.788 ISK
435.045 ISK
6.257 ISK1,5%
22,4%1,9
9C
hristin
e Rick
enb
ach1
23
710.674 ISK
26733.615 ISK
45.506 ISK789.795 ISK
870.090 ISK
80.295 ISK10,2%
22,4%1,9
12C
hristin
a Dan
nen
berg
2
24
355.337 ISK
16220.385 ISK
45.506 ISK421.228 ISK
544.170 ISK
122.942 ISK29,2%
53,1%1,9
5Ju
tta Bein
1
25
355.337 ISK
32741.175 ISK
45.506 ISK442.018 ISK
544.170 ISK
102.152 ISK23,1%
53,1%1,9
16H
elena B
aeriswyl
1
26
355.337 ISK
16220.385 ISK
45.506 ISK421.228 ISK
544.170 ISK
122.942 ISK29,2%
53,1%1,9
5Sab
ine Ju
d1
27
438.243 ISK
16420.618 ISK
45.506 ISK504.367 ISK
579.090 ISK
74.723 ISK14,8%
32,1%1,6
6D
ieter Pö
lloth
2
28
438.243 ISK
14918.728 ISK
45.506 ISK502.477 ISK
579.090 ISK
76.613 ISK15,2%
32,1%1,6
5Stefan
Wo
lf2
29
438.243 ISK
26933.848 ISK
45.506 ISK517.597 ISK
579.090 ISK
61.493 ISK11,9%
32,1%1,6
13Sab
ine D
inkel
2
210
438.243 ISK
14918.728 ISK
45.506 ISK502.477 ISK
590.730 ISK
88.253 ISK17,6%
34,8%1,6
5W
olfg
ang K
eilbach
2
31
329.994 ISK
37847.628 ISK
45.506 ISK423.128 ISK
424.860 ISK
1.732 ISK0,4%
28,7%27
9R
ob
ert Fin
deisen
2
32
465.891 ISK
33341.958 ISK
45.506 ISK553.355 ISK
650.094 ISK
96.739 ISK17,5%
39,5%17
12T
heo
Busch
2
33
197.298 ISK
28535.910 ISK
45.506 ISK278.714 ISK
325.629 ISK
46.915 ISK16,8%
65,0%20
7H
elena K
leinert
1
34
593.640 ISK
31840.068 ISK
45.506 ISK679.214 ISK
771.150 ISK
91.936 ISK13,5%
29,9%17
11In
ga C
lausen
2
35
245.895 ISK
36646.116 ISK
45.506 ISK337.517 ISK
385.575 ISK
48.058 ISK14,2%
56,8%29
7C
hristin
e Lieb
l2
36
375.390 ISK
23729.862 ISK
45.506 ISK450.758 ISK
528.165 ISK
77.407 ISK17,2%
40,7%18
5A
do
lf Lin
k2
37
435.045 ISK
47459.724 ISK
45.506 ISK540.275 ISK
508.668 ISK
-31.607 ISK-5,9%
16,9%31
13Sim
on L
ösch
2
38
236.438 ISK
25832.508 ISK
45.506 ISK314.452 ISK
305.550 ISK
-8.902 ISK-2,8%
29,2%17
7R
üd
iger H
errman
n2
39
371.316 ISK
29737.422 ISK
45.506 ISK454.244 ISK
515.943 ISK
61.699 ISK13,6%
38,9%13
12H
eike C
ox
2
41
932.946 ISK
39349.518 ISK
45.506 ISK1.027.970 ISK
1.149.596 ISK
121.626 ISK11,8%
23,2%32
7R
ita Warten
berg
4
42
1.034.214 ISK
29136.666 ISK
45.506 ISK1.116.386 ISK
1.413.242 ISK
296.856 ISK26,6%
36,6%19
8C
hristin
a Dem
ant
6
43
558.284 ISK
51665.016 ISK
45.506 ISK668.806 ISK
833.715 ISK
164.910 ISK24,7%
49,3%39
11M
ichael R
aab2
44
632.925 ISK
33041.580 ISK
45.506 ISK720.011 ISK
791.520 ISK
71.509 ISK9,9%
25,1%20
10Irin
a Lex
1
45
488.735 ISK
31239.312 ISK
45.506 ISK573.553 ISK
646.602 ISK
73.050 ISK12,7%
32,3%13
13K
arin A
nto
n2
46
857.432 ISK
38748.762 ISK
45.506 ISK951.700 ISK
1.388.361 ISK
436.662 ISK45,9%
61,9%28
9Jo
han
nes P
irringer
4
47
710.040 ISK
57071.820 ISK
45.506 ISK827.366 ISK
908.793 ISK
81.427 ISK9,8%
28,0%25
23L
oth
ar Lissm
ann
2
48
423.987 ISK
38148.006 ISK
45.506 ISK517.499 ISK
502.266 ISK
-15.233 ISK-2,9%
18,5%24
11U
we H
uch
el2
49
357.348 ISK
28535.910 ISK
45.506 ISK438.764 ISK
598.878 ISK
160.114 ISK36,5%
67,6%15
10Ju
erg B
issegger
2
410
532.967 ISK
45056.700 ISK
45.506 ISK635.173 ISK
659.697 ISK
24.525 ISK3,9%
23,8%30
12M
artin Z
ehen
tmaier
2
411
714.114 ISK
27935.154 ISK
45.506 ISK794.774 ISK
1.067.243 ISK
272.469 ISK34,3%
49,4%16
9San
dra W
ild
4
ne
gative p
rofit e
qu
als loss
see
table
16 for
exp
lanatio
ns
