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22.6 Luxembourg SME Activity-Based Costing Applications

Luxembourg SME Characteristics​

Luxembourg SMEs that may benefit from ABC:

  • Service companies with diverse services
  • Manufacturing with multiple products
  • Businesses with significant overhead
  • Companies with complex operations
  • Businesses needing accurate cost information

Example 1: Luxembourg Service Company​

Consulting Firm - ABC Implementation:

Activities:

  • Client acquisition: €10,000 (cost driver: number of new clients)
  • Project setup: €8,000 (cost driver: number of projects)
  • Research: €12,000 (cost driver: research hours)
  • Client meetings: €6,000 (cost driver: meeting hours)
  • Report preparation: €4,000 (cost driver: number of reports)
  • Total overhead: €40,000

Cost Driver Volumes:

  • New clients: 20
  • Projects: 40
  • Research hours: 400
  • Meeting hours: 200
  • Reports: 80

Activity Rates:

  • Client acquisition: €10,000 ÷ 20 = €500 per client
  • Project setup: €8,000 ÷ 40 = €200 per project
  • Research: €12,000 ÷ 400 = €30 per hour
  • Client meetings: €6,000 ÷ 200 = €30 per hour
  • Report preparation: €4,000 ÷ 80 = €50 per report

Client Project Analysis:

Project A (Simple):

  • Direct labor: 20 hours × €100 = €2,000
  • Activity costs:
    • Client acquisition: €500 (if new client)
    • Project setup: €200
    • Research: 5 hours × €30 = €150
    • Meetings: 2 hours × €30 = €60
    • Reports: 1 × €50 = €50
    • Total activity: €960
  • Total cost: €2,960

Project B (Complex):

  • Direct labor: 60 hours × €100 = €6,000
  • Activity costs:
    • Client acquisition: €0 (existing client)
    • Project setup: €200
    • Research: 30 hours × €30 = €900
    • Meetings: 10 hours × €30 = €300
    • Reports: 3 × €50 = €150
    • Total activity: €1,550
  • Total cost: €7,550

Insights:

  • Complex projects consume more activities
  • ABC shows true cost difference
  • Supports better pricing

Example 2: Luxembourg Manufacturing SME​

Small Manufacturer - ABC Implementation:

Activities:

  • Material handling: €6,000 (cost driver: number of material moves)
  • Machine setup: €8,000 (cost driver: number of setups)
  • Quality inspection: €4,000 (cost driver: number of inspections)
  • Production: €12,000 (cost driver: machine hours)
  • Total overhead: €30,000

Cost Driver Volumes:

  • Material moves: 300
  • Setups: 200
  • Inspections: 400
  • Machine hours: 2,000

Activity Rates:

  • Material handling: €6,000 ÷ 300 = €20 per move
  • Machine setup: €8,000 ÷ 200 = €40 per setup
  • Quality inspection: €4,000 ÷ 400 = €10 per inspection
  • Production: €12,000 ÷ 2,000 = €6 per machine hour

Product Costing:

Product X (High Volume, Simple):

  • Direct materials: €50
  • Direct labor: €30
  • Activity costs:
    • Material moves: 1 × €20 = €20
    • Setups: 0.1 × €40 = €4 (shared across many units)
    • Inspections: 0.1 × €10 = €1
    • Production: 2 hours × €6 = €12
    • Total activity: €37
  • Total cost: €117

Product Y (Low Volume, Complex):

  • Direct materials: €80
  • Direct labor: €50
  • Activity costs:
    • Material moves: 3 × €20 = €60
    • Setups: 1 × €40 = €40
    • Inspections: 2 × €10 = €20
    • Production: 5 hours × €6 = €30
    • Total activity: €150
  • Total cost: €280

Example 3: Luxembourg Restaurant (Detailed ABC)​

Marie's Restaurant - Complete ABC Analysis:

Overhead Activities:

  1. Menu Development: €3,000 (cost driver: number of menu items)
  2. Ingredient Ordering: €2,500 (cost driver: number of orders)
  3. Food Preparation Setup: €4,000 (cost driver: number of prep sessions)
  4. Cooking: €10,000 (cost driver: cooking hours)
  5. Plating: €2,000 (cost driver: number of plates)
  6. Service: €3,000 (cost driver: service hours)
  7. Cleanup: €2,500 (cost driver: cleanup hours)
  8. Administration: €2,000 (cost driver: number of transactions)
  • Total overhead: €29,000

Cost Driver Volumes:

  • Menu items: 25
  • Orders: 50
  • Prep sessions: 400
  • Cooking hours: 500
  • Plates: 3,000
  • Service hours: 600
  • Cleanup hours: 200
  • Transactions: 1,000

Activity Rates:

  • Menu development: €3,000 ÷ 25 = €120 per item
  • Ordering: €2,500 ÷ 50 = €50 per order
  • Prep setup: €4,000 ÷ 400 = €10 per session
  • Cooking: €10,000 ÷ 500 = €20 per hour
  • Plating: €2,000 ÷ 3,000 = €0.67 per plate
  • Service: €3,000 ÷ 600 = €5 per hour
  • Cleanup: €2,500 ÷ 200 = €12.50 per hour
  • Administration: €2,000 ÷ 1,000 = €2 per transaction

Menu Item: Complex Signature Dish

Direct Costs:

  • Ingredients: €10
  • Direct labor (chef): €8
  • Total direct: €18

Activity Consumption (per dish):

  • Menu development: €120 ÷ (dishes per item) = €0.20
  • Ordering: (orders for this item) ÷ dishes = €0.15
  • Prep setup: 0.1 sessions × €10 = €1.00
  • Cooking: 0.3 hours × €20 = €6.00
  • Plating: 1 × €0.67 = €0.67
  • Service: 0.05 hours × €5 = €0.25
  • Cleanup: 0.1 hours × €12.50 = €1.25
  • Administration: 1 × €2 = €2.00
  • Total activity: €11.52

Total Cost:

  • Direct: €18.00
  • Activity: €11.52
  • Total: €29.52

Selling Price: €35 Profit: €5.48 (15.7% margin)

Menu Item: Simple Side Dish

Direct Costs:

  • Ingredients: €3
  • Direct labor: €2
  • Total direct: €5

Activity Consumption (per dish):

  • Menu development: €0.20
  • Ordering: €0.10
  • Prep setup: 0.02 × €10 = €0.20
  • Cooking: 0.05 hours × €20 = €1.00
  • Plating: 1 × €0.67 = €0.67
  • Service: 0.02 hours × €5 = €0.10
  • Cleanup: 0.02 hours × €12.50 = €0.25
  • Administration: 1 × €2 = €2.00
  • Total activity: €4.52

Total Cost:

  • Direct: €5.00
  • Activity: €4.52
  • Total: €9.52

Selling Price: €12 Profit: €2.48 (20.7% margin)

Analysis:

  • Simple dish has higher margin (20.7% vs. 15.7%)
  • Complex dish consumes more activities
  • ABC shows true profitability
  • Can make better menu decisions

Implementing ABC in Luxembourg SMEs​

Steps:

  1. Identify Activities: List all major activities
  2. Assign Costs: Determine cost of each activity
  3. Identify Drivers: Find what drives each activity
  4. Calculate Rates: Compute activity rates
  5. Apply to Products: Allocate costs to products/services
  6. Analyze Results: Compare to traditional costing
  7. Make Decisions: Use information for decisions

Challenges:

  • Identifying activities
  • Tracking cost drivers
  • Maintaining system
  • Cost of implementation
  • Training staff

Benefits:

  • More accurate costs
  • Better decisions
  • Improved profitability
  • Better pricing
  • Cost management

Simplified ABC for Small Businesses​

For Very Small Businesses:

  • Focus on major activities only
  • Use simple cost drivers
  • Don't overcomplicate
  • Balance accuracy with cost

Example:

  • 3-5 major activities
  • Simple drivers (hours, counts)
  • Monthly or quarterly updates
  • Focus on high-impact areas

Luxembourg Compliance Note​

For Luxembourg SMEs:

  • ABC is optional but valuable
  • Use for internal management
  • Consider cost vs. benefit
  • Start simple, expand if needed
  • PCN accounts support implementation
  • Can improve profitability significantly

Think It Through​

How can a Luxembourg SME implement ABC without it being too complex or expensive? What are the key activities and cost drivers for your type of business?