152 ACCOUNTING FOR MANAGERS
A first step is to calculate the cost of the different functions carried out by each
sales representative:
employment cost of £40,000
×70% of time
100 existing customers=£280 per customer(account maintenance)employment cost of £40,000
×30% of time
10 new customers=£1,200 per new customerThe cash cost of winning a new customer is £1,200. However, the opportunity cost
provides a more meaningful cost. If there were no lost business and sales represen-
tatives could spend all of their time with existing customers, each representative
could look after 142 customers (100×100/70) in the same time.
If each of the 142 customers placed the average five orders with an average
order size of £2,500, each representative could generate income of £1,775,000 and
earn commission of £17,750. The opportunity cost is the loss of the opportunity
by the company to generate the extra income of £525,000 (£1, 775 , 000 −£1,250,000)
and the opportunity cost to the representative personally of £5,250 (commission
of £17, 750 −£12,500).
Each customer lost costs Trojan £1,200 in time taken by sales representatives
to find a replacement customer. However, on an opportunity cost basis, each
lost customer potentially costs the company £52,500 in lost sales and the sales
representative £525 in lost commission.
For this kind of reason, businesses sometimes adopt a strategy of splitting their
salesforce into those representatives who are good at new account prospecting
and those who are better at account maintenance.
Conclusion
This chapter has calculated the cost of labour and developed relevant costs to
include labour. It has introduced the concept of activity-based costing as a method
by which the cost of business processes can be measured in order to improve
business decision-making.
References............................................
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Cooper, R. (1990). Cost classifications inunit-based and activity-based manufacturing cost
systems.Journal of Cost Management, Fall, 4 – 14.
Cooper, R. and Kaplan, R. S. (1988). Measure costsright: make the right decisions.Harvard
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