Refining Cost Allocation of Professional Services in a Software as a Service Business, Case Company: Leanheat Oy
Ozolina, Lina (2024)
2024
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Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:amk-202404298188
https://urn.fi/URN:NBN:fi:amk-202404298188
Tiivistelmä
This research-based bachelor’s thesis, commissioned by Danfoss, investigates cost accounting methods applicable to Software as a Service (SaaS) businesses and assesses their applicability to Leanheat Oy’s indirect cost allocation, particularly regarding in-house professional services. By challenging traditional ideas and offering a fresh viewpoint on cost allocation, this research aims to contribute to the ongoing changes in accounting practices for software-based businesses.
The research was conducted through a mix of desktop research and qualitative interviews. Qualitative data was gathered through virtual one-on-one interviews with employees from various financial roles within Leanheat Oy and Danfoss, which ensured a wide range of perspectives. The author’s choice of semi-structured interviews and thematic analysis provided meaningful observations of cost accounting methods, challenges in allocating costs, and discussion of factors affecting decision-making in SaaS businesses.
The principles of responsibility accounting and cost accounting methods were studied to explore practices applicable for allocating indirect costs in SaaS businesses, as well as the effects of selected method on the decision-making processes. The characteristics and the distinct cost structure of SaaS businesses were used as a theoretical framework to identify the challenges in allocating costs related to in-house professional services employees to the cost of goods sold (COGS), and the consequent implications on SaaS businesses’ financial statements.
The research findings highlight the importance of a tailored cost accounting approach, integrating elements from activity-based costing and time-driven activity-based costing to accommodate to the cost structure of SaaS businesses. By leveraging more advanced cost allocation techniques, Leanheat Oy can gain deeper insights into cost drivers and refine resource and cost allocation. Transparency and flexibility of cost management policies remain significant challenges when considering whether professional services costs can be considered as a part of COGS. Using sophisticated cost accounting methods demonstrates a deeper understanding of cost structures and drivers, allowing decision-makers to better allocate resources, develop pricing strategies, and conduct comprehensive profitability analyses.
The author suggests Leanheat Oy invest in the development of tailored cost allocation guidelines to accurately assign indirect costs to various activities and outputs. The introduction of advanced systems for expense and revenue recognition should be prioritized to streamline workflows. Establishing a clear correlation between costs incurred and revenue generated will refine resource consumption and support sustainable business growth. Continuous review and adjustment of cost accounting practices are recommended to remain updated with industry changes.
The research was conducted through a mix of desktop research and qualitative interviews. Qualitative data was gathered through virtual one-on-one interviews with employees from various financial roles within Leanheat Oy and Danfoss, which ensured a wide range of perspectives. The author’s choice of semi-structured interviews and thematic analysis provided meaningful observations of cost accounting methods, challenges in allocating costs, and discussion of factors affecting decision-making in SaaS businesses.
The principles of responsibility accounting and cost accounting methods were studied to explore practices applicable for allocating indirect costs in SaaS businesses, as well as the effects of selected method on the decision-making processes. The characteristics and the distinct cost structure of SaaS businesses were used as a theoretical framework to identify the challenges in allocating costs related to in-house professional services employees to the cost of goods sold (COGS), and the consequent implications on SaaS businesses’ financial statements.
The research findings highlight the importance of a tailored cost accounting approach, integrating elements from activity-based costing and time-driven activity-based costing to accommodate to the cost structure of SaaS businesses. By leveraging more advanced cost allocation techniques, Leanheat Oy can gain deeper insights into cost drivers and refine resource and cost allocation. Transparency and flexibility of cost management policies remain significant challenges when considering whether professional services costs can be considered as a part of COGS. Using sophisticated cost accounting methods demonstrates a deeper understanding of cost structures and drivers, allowing decision-makers to better allocate resources, develop pricing strategies, and conduct comprehensive profitability analyses.
The author suggests Leanheat Oy invest in the development of tailored cost allocation guidelines to accurately assign indirect costs to various activities and outputs. The introduction of advanced systems for expense and revenue recognition should be prioritized to streamline workflows. Establishing a clear correlation between costs incurred and revenue generated will refine resource consumption and support sustainable business growth. Continuous review and adjustment of cost accounting practices are recommended to remain updated with industry changes.