Three customers look equally profitable when overhead is spread by revenue. Re-cost them by the deliveries and returns they cause.

On activity, A earns Rs 2.4 crore, B Rs 1.4 crore and C loses Rs 0.8 crore; the total is still Rs 3 crore, but the revenue allocation hid which customer was eating it. A delivery costs Rs 2,000 and a return Rs 20,000. C buys Rs 10 crore in 13,000 drops of Rs 7,692 each, so it consumes Rs 3.8 crore of the Rs 6 crore of overhead. The fix is to price C for the work it causes: a delivery charge of about Rs 615 a drop, a minimum drop size, or an 8% rate rise at renewal.

Find the rate for each activity. Rs 4 crore of delivery cost over 20,000 deliveries is Rs 2,000 a delivery; Rs 2 crore of returns cost over 1,000 returns is Rs 20,000 a return. Then charge each customer for what it used. A used 2,000 deliveries and 100 returns, Rs 0.4 crore plus Rs 0.2 crore; C used 13,000 and 600, Rs 2.6 crore plus Rs 1.2 crore, nearly twice what it was allocated. Three friends split a restaurant bill equally; one of them ordered three courses and the others had soup. The bill is right and the split is wrong, and the soup drinkers are paying for the third friend's dessert. Activity based costingTracing overhead to the activities that cause it, such as deliveries, orders or returns, and charging each product or customer for the activities it consumes, rather than spreading overhead by revenue or volume. is the itemised bill.

Because revenue is not what causes overhead. The three customers pay the same Rs 10 crore but buy it in very different shapes: A in 2,000 drops worth Rs 50,000 each, C in 13,000 drops worth Rs 7,692 each. A delivery van does not care about the invoice value; it costs Rs 2,000 to make a drop whether the parcel is worth Rs 500 or Rs 50,000, so the customer with small frequent orders consumes 65% of the delivery pool while paying a third of the bill. The error is not small. A's true margin is 24%, C's is -8%, and a sales team paid on revenue will keep bringing in C-shaped customers because every one of them looks like a Rs 1 crore account on the management pack.

Not drop it, at least not first. C's revenue is a third of the business and some of the Rs 6 crore of overhead is fixed: lose C and the vans and the returns desk do not shrink by Rs 3.8 crore overnight, so the loss would partly land on A and B. Price the behaviour instead: a delivery charge of about Rs 615 a drop, or a minimum drop value, takes C to breakeven while leaving C the choice to consolidate orders; C breaks even at about 9,000 deliveries with returns unchanged, and at A's drop size it would need only 2,000. The returns deserve the same treatment, since each one costs Rs 20,000 and C's 600 cost more than B's whole overhead bill. Then change what sales is paid on, from revenue to activity-costed margin, or the next C arrives next quarter.

Say the limitation. Two pools and two drivers is a model, not the truth: the delivery pool probably has a fixed element that should not be charged per drop, and some returns are Vahanika's own fault. The rates are averages, so a customer in a dense city is cheaper per drop than one in the hills. Activity costing is for the decision in front of you, pricing and customer mix, and it should be rebuilt when the mix changes, not run as a monthly ritual.