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24th Feb 2016

& Group No:


Group Members:

Niraj Krishna
Anjana Sharma, Bhavana Menon,
Ashutosh Bhardwaj, Mohd. Aariz Ali, Kasi V.

Activity Based Management at Stream International

Question 1:
Why (or why not) is an activity-based cost analysis useful prior to initiating a reengineering
project? Why would Mike Michalski be attracted to an ABC project at Stream?
Answer 1:
Activity Based cost analysis is useful prior to reengineering project.
This analysis will help us in the individual analysis of the following cost:

Inventory cost

Administrative cost

Distribution cost

Other unknown overheads

Michalski would be attracted to an ABC project at Stream because Stream was growing at an
exponential rate and it was difficult to handle the individual costing on day to day basis.
In addition to not knowing the costs of doing business with external customers or with the book
division next door, they were throwing resources at problems relying completely on their instincts
rather on analytical thinking.
Hence it is imperative for them to change their costing methodology, in order to recognize the
major and hidden costs.
Question 2:
Comment on the development of the ABC model at Stream. What has been done well? What is
inadequate or missing from the analysis?
Answer 2:
After the implementation of ABC model at Stream, the following changes have been done well:

Able to recognize the cost associated with the non-major activities.

Able to recognize the small volume of costs involved with a non-major activity, which
sums up to a large sum of money
Able to recognize the hidden costs associated
Able to identify the profitable and non-profitable sectors
Able to price the products properly.
Able to identify the inventory. For example, some of the items placed by IBM products
were still in their inventory. They have identified this and allocated a separate storage for
IBM-specific inventory.

The following items should have been added:

They have not been able to calculate the distribution costs based on distance.
Data for the Customer care support. For example, how much money is spent to each
customer on customer care support, how responsive the customer care support, the
average time spent on each call has been missing.

Question 3:
What are the strengths and weaknesses of the five process improvement projects? Which project
should the management team select? Why?
Answer 3:
As mentioned earlier in the benefits all the proposals seem appealing in an organizational point of
view. However, there are a few challenges in terms of lack of an appropriate managerial tool which
forbids you from incorporating all the same time.
The detailed analysis on the merits and demerits of each proposal is mentioned below.
1. ABM Process Improvement Proposal: Responding to Customer

Reduce Adhoc Reporting

Eliminate Redundant Reporting
Reduce Redundant follow-ups
Revenue Generation Information services
Consolidate Client Information
Department wise segregation to gain better clarity on customer requests

2. Price of Quality

Critical analysis of quality expenses

Improving the training and direction for line workers
Improving the quality of customer services


No schedule for implementation

Scarcity of managerial resources

3. Manage Work-In-Progress and Finished Goods Inventory Space


To recognize the inactive inventory

To recognize the storage cost
Able to reduce the inventory by convincing clients to pay more for storage


Quarterly savings are less when compared to other models

4. Billing Costs

Critical analysis on money spent of billing cost

Resolving redundancy of the same function
Better understanding , identifying and simplifying the process
Centralization of functions
Improve communication with clients


Lack of clarity on savings

Lack of clarity on managerial resources needed
Lack of clarity on the time frame required

Question 4:
What are the most important lessons from this case in your opinion?

Answer 4:
From reading the most important lessons that we have learned are as follows: Boost firms profitability:
ABC costing method has helped Stream International to estimate their costs of products /
services by assigning overhead costs to direct costs. Activity-based costing (ABC) is a
managerial accounting system which proves the above statement and is very useful for
firms in determining overhead and direct costs which results in firms profitability. ABC
costing method provides us sufficient information to make better decisions about the
profitability of several product lines in an organization.
Resource Allocation:
ABC costing allowed Stream International to have the most accurate costing of the
products/services by allocation the resources in the best possible way. Stream International
used ABC costing method which helped in profitability by allocating resources to profitable
Increase firms productivity:
Stream International realized that ABC costing is easier to understand. This method not
only helped Stream International to have a deeper understanding of its products but also it
helped in exposing waste and inefficiency to boost its productivity.