Executive Summary

^{Author: Daniela Fonsi — Advisor: Ricardo Franceli Da Silva}

^{Summary prepared by the ResumeAI tool, an artificial intelligence solution developed by the Pecege Institute focused on synthesis and writing.}

This work applied the activity-based costing (ABC) method in a building services company to identify clients that harm its profitability. The research starts from the premise that small service companies face challenges in cost management, compromising pricing and profitability analysis. The lack of structured costing methods can lead to misguided decisions, masking deficit contracts that consume disproportionate resources and erode profit margins. The investigation therefore sought to provide a more accurate management tool for the company, allowing a clear visualization of each client’s contribution to the financial result.

The growing competitiveness in the service market demands that organizations seek differentials (Santos et al., 2018). In this context, cost management becomes a strategic pillar for planning, control, and decision-making. For small businesses, this management is even more critical, as operational efficiency is the path to profit and sustainability (Teixeira et al., 2018). The lack of knowledge about the costs incurred in service provision prevents adequate pricing and a reliable profitability analysis, a common scenario in small companies in the sector (Abbas et al., 2012).

The relationship between cost and profit is fundamental to an organization’s financial health. The ability to control operations depends on a deep understanding of costs (Santos et al., 2018). Although the market influences prices, a robust costing method allows the company to manage its expenses and optimize its profit margin (Yanase, 2018). In the service sector, knowing the costs associated with each contract is essential for aligning pricing strategy with profitability objectives (Fernandes et al., 2014).

To overcome the limitations of traditional methods, which arbitrarily allocate indirect costs, Activity-Based Costing (ABC) emerges as a more precise alternative. The ABC method proposes that products or services consume activities, and activities consume resources. By tracking the consumption of resources by activities and, subsequently, the consumption of activities by cost objects (such as customers), ABC provides a more accurate allocation of indirect costs (Bruni and Famá, 2019). This methodology allows for the differentiation of customers with high and low resource consumption, revealing which are truly profitable and which may generate hidden losses, thereby enriching the company’s strategy (Hansen and Mowen, 2012).

The implementation of ABC Costing offers managerial benefits, such as visualizing which clients contribute most to profit, analyzing the cost of serving each client, and creating pricing strategies aligned with the desired margin (Soares and Amaral, 2023). Cost management, when strategic, becomes a proactive instrument for competitive advantage (Martins, 2018). For the company under study, the application of ABC represents an opportunity to replace a simplistic allocation system with an analysis that reflects the real complexity of its operations.

A case study was developed in a small-sized company that outsources cleaning, doorman, and janitorial services for condominiums in São Paulo. The research was exploratory and descriptive, with a qualitative approach for an in-depth understanding of the organization and its processes (Minayo, 2001). The choice of a case study is justified by the need for an intensive and contextualized analysis of a phenomenon in its real environment (Goldenberg, 2011).

The instruments for data collection were bibliographic and documentary research. The bibliographic research grounded the theory on cost management and the ABC method. The documentary research was the primary source of operational data, involving the analysis of internal reports such as cost spreadsheets, revenue statements, payrolls, and contracts. The analysis period corresponded to the average of the months of January, February, and March 2025, and the study was conducted between March and September of the same year. To protect the company’s identity, financial values were anonymized using a multiplier factor.

The implementation of the ABC method followed the steps from the literature (Martins, 2025), with support from Peron’s matrices (2021). The first stage consisted of identifying costs and mapping activities. Next, resource drivers were defined to allocate resource costs to activities. The third stage was the actual assignment of costs to activities. Subsequently, activity drivers were chosen to allocate activity costs to cost objects (services provided to each client). The final stage was the assignment of activity costs to clients to calculate individual profitability.

The process was divided into two phases. In the first, information was collected and organized, including mapping the organizational structure, identifying resources, classifying costs, and defining the activities of the administrative and operational sectors. In this phase, resource and activity drivers were also established. In the second phase, the drivers were applied to assign indirect costs to activities using resource-activity matrices. Subsequently, with activity-product matrices, the costs of the activities were allocated to the services and, consequently, to each client. Finally, a comparative analysis was carried out between the results of ABC and the company’s traditional costing model, evaluating the potential of the new model for decision-making.

The company studied has its administrative headquarters in São Paulo and has 89 employees, including a General Director, Finance and Personnel departments, an Operational Supervisor, and the field team. The first stage of the analysis was the calculation of resources, classifying them into direct and indirect costs. Direct costs, easily attributable to services, were composed of outsourced labor (salaries, charges, benefits) and equipment and materials, with labor representing the largest share.

Indirect costs, whose allocation requires apportionment criteria (Santos et al., 2018), totaled R$ 78,956.64 on a monthly average. They included administrative labor, office supplies, system maintenance, consumption (energy, telephone), headquarters infrastructure, supervision vehicle costs, equipment depreciation, and taxes. Administrative labor and taxes represented the most significant portions. The correct allocation of these costs is the core of the ABC method, as these are the costs that traditional systems tend to distort.

The application of the ABC method began with the definition of resource drivers for each indirect cost. For example, the cost of administrative labor was driven based on the hours worked in each activity, while the cost of the vehicle was driven by the number of supervision visits. With the drivers defined, a resource-activity matrix was built. The mapped activities were: (A1) Customer prospecting, (A2) Employee hiring, (A3) Schedule assembly, (A4) Post supervision, (A5) Payroll issuance, and (A6) Billing and collection.

The quantification of the resource-activity matrix allowed for the calculation of the total cost of each activity. The analysis revealed an unexpected result: the highest cost activity was “Payroll issuance” (A5), at R$ 29,197.92, representing almost 37% of the total cost of activities. In second place was “Post supervision” (A4), at R$ 15,143.10. The initial expectation was that supervision would be the most expensive activity. This finding, similar to Peron (2021), demonstrates how ABC can reveal counter-intuitive cost dynamics, highlighting the high administrative dependence of the business.

In the next stage, the costs of the activities were allocated to the three services provided (reception, cleaning, and janitorial services) through activity drivers. The cost of the “Employee Admission” activity, for example, was driven by the number of admissions in each service. This process resulted in the total indirect cost for each service: reception (R$ 39,433.32), cleaning (R$ 32,223.32), and janitorial services (R$ 7,300.00). The reception service absorbed the largest portion of indirect costs (approximately 50%), mainly due to concentrating the largest number of employees.

To obtain the total cost per customer, direct costs were summed with allocated indirect costs. Direct costs were assigned to each customer based on the number of employees for each service in their contracts. The indirect costs for each service were allocated per employee and multiplied by the number of employees in each customer. The total cost per customer analysis revealed great heterogeneity in the portfolio, with customers such as C22, C5, and C9 concentrating a significant portion of the costs, while others, such as C17 and C24, represented lower costs.

The final profitability analysis per client compared the net revenue of each with its total cost determined by ABC. The results were revealing: out of 26 clients, 24 showed a positive result, generating a combined gross profit of R$ 151,349.16. However, the analysis exposed two deficit clients, C18 and C7, which together generated a monthly loss of R$ 1,038.21. Curiously, these clients were not among those with the highest total costs, but their direct costs, especially labor, were disproportionately high in relation to their revenues.

The comparison with the company’s current costing method, which allocates indirect costs based on net revenue, evidenced the superiority of ABC. The traditional method identified only customer C18 as unprofitable. Customer C7, which ABC revealed as unprofitable, appeared profitable in the old model, as it received a lower allocation of indirect costs due to its smaller share of revenue. This distortion masked the operational reality, in which customer C7 consumed more activity resources than its revenue justified. ABC provided a more accurate view of resource consumption, correcting distortions and revealing hidden losses, as also observed by Fernandes et al. (2014).

In conclusion, the costing method traditionally used by the company, based on proportional allocation to revenue, smoothed the differences in resource consumption among clients, making it difficult to identify deficit contracts. The application of Activity-Based Costing (ABC) provided a more granular and precise analysis, revealing heterogeneous profitability in the client portfolio and identifying contracts that compromised the overall profit margin. The identification of these deficit clients offers management valuable information for strategic decisions, such as contract renegotiation, price adjustments, process optimization, or the discontinuation of partnerships that do not add financial value.

For small businesses in the service sector, where margins are tight and efficient resource management is a critical factor, the adoption of costing methods such as ABC represents a competitive advantage. The research reinforces that precise cost management enriches the decision-making process, allowing managers to act proactively in the pursuit of efficiency and financial sustainability. It is concluded that the objective was achieved: it was demonstrated that the application of the activity-based costing method allowed for the precise identification of customers who harm the company’s profitability, providing a robust management tool to improve its business strategy.

References:
^{Abbas, K.; Gonçalves, M. N.; Leoncine, M. 2012. Costing methods: advantages, disadvantages, and their applicability in different types of organizations presented in the literature. Contexto – Journal of the Postgraduate Program in Controladoria e Contabilidade da UFRGS 12(22): 145-159.
Bruni, A. L.; Famá, R. 2019. Finance in Practice Series – Cost Management and Pricing. 7th ed. Atlas, Rio de Janeiro, Brazil.
Fernandes, M. G.; de Faria, A. C.; Crispim, S. F.; Fernandes, F. C. 2014. Cost to serve customers: an action-research in condominium administration in Baixada Santista (SP). Enfoque: Reflexão Contábil 33(3): 1-19.
Goldenberg, M. 2011. The art of research: How to conduct qualitative research in social sciences. 12th ed. Editora Record, Rio de Janeiro, Rio de Janeiro, Brazil.
Hansen, D. R.; Mowen, M. M. 2012. Cost Management: Accounting and Control. +Education – Cengage Learning Brasil, Porto Alegre, Brazil.
Martins, E. 2018. Cost Accounting. 11th ed. Atlas, Rio de Janeiro, Brazil.
Martins, E. 2025. Cost Accounting. 12th ed. Atlas, Rio de Janeiro, Brazil.
Meurer, P. 2009. Cost information for services provided by a company in condominium administration and supply of cleaning, doorman, gardening, and janitorial labor. Monograph for Bachelor of Accounting Sciences. Universidade Federal de Santa Catarina, Florianópolis, SC, Brazil.
Minayo, M. C. de S. 2001. Social research: theory, method, and creativity. 18th ed. Vozes, Petrópolis, Brazil.
Peron, D. A. Z. 2021. ABC Costing System and its implementation at DAZ, Lda. Master’s Dissertation in Management Control and Business. Instituto Superior de Contabilidade e Administração de Lisboa, Lisbon, Portugal.
Santos, A. A. D.; Silva, F. P. D.; Barreto; J. D. S; Guazzelli, A. M. 2018. Cost Management. Sagah, Porto Alegre, RS, Brazil.
Soares, I. A. F.; Amaral, J. V. 2023. Cost Management for Service in an Art Transport Company. Sociedade, Contabilidade e Gestão, 18(1): 95-107.
Teixeira, A. C. C. P.; Neto, A. G. de A.; Ferreira, F. J. 2018. The Use of cost concepts and their influence on sales price decisions in micro and small enterprises. REMIPE – Revista De Micro E Pequenas Empresas E Empreendedorismo Da Fatec Osasco 1(2): 206–222.
Yanase, J. 2018. Costs and pricing. 1st ed. Trevisan Editora, São Paulo, Brazil.}

Executive summary from the Final Coursework of the Specialization in Finance and Controllerhsip of the MBA USP/Esalq

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