Will Activity-Based Costing Impact Your Next Vacation?

Spirit Airlines has rocked the travel scene once again. From the carrier that was the first to introduce checked baggage fees, comes a new fee. On April 6, 2010 Spirit Airlines announced they will begin to charge up to $45 for carry-on baggage. Such a notification has created an uproar all the way to the US Senate where some are already working to ensure that “items essential to people’s health, work and safety can be carried on board without extra fees.” (Bloomberg Business Week, April 13, 2010, Spirit’s Carry-On Bag Fees Draw Senate Legislation)

However, one may wonder if such a bold decision by CEO, Ben Baldanza might have come about after a review of overhead costs and, specifically, activity-based costing (ABC). ABC is a cost management method for attributing indirect costs to the activities that drive cost. (ISM Glossary)

Certainly, the weight of baggage in overhead bins contributes to additional fuel costs. In addition, according to Ben Baldanza, there are other indirect costs associated with carry-on baggage including, “Longer security and boarding lines, injuries from overcrowded overhead bins, delayed flights and passenger frustration.” (USA Today, April 13, 2010, Opposing view: A win for everybody)

It is one thing to use activity-based costing to identify activities that drive costs in an organization. It is another to directly pass those costs onto the consumer that carries out that specific activity. Time will tell if such an attempt by Spirit Airlines will be successful, if other carriers will follow suit, or if legislation will be introduced banning the carry-on baggage activity-specific fees.

CPSM Study Guide 1: Task 1-B-4: Perform cost/benefit analyses on acquisitions