An Activity-Based Costing Project revealed that pricing
based on standard cost was severely distorted
The not-for-profit organization could not arbitrarily raise
prices since many customers were sitting on its board. The board
would allow the organization to adjust prices to a break-even
point if it could justify the higher cost.
Strategic pricing and cost justification allowed the
organization to increase profits by $800,000.
Further, the organization consisted of two main business
units. The project revealed that over $1,000,000 of overhead
should be shifted to the other unit, because it was actually
consuming more of overhead.
The prior method of allocating
overhead based on sales dollars was inadequate.
Finally, one of the smaller business unit was able to properly justify
its costs leading to a 90% increase of annual Medicare
reimbursements