Dakota Office Products saw an increase in sales with the introduction of new electronic services like EDI and an online store, but reported a net loss for 2000. The company needs to understand why and take actions to regain profitability. An ABC costing system is recommended to properly assign indirect costs based on activities and customers. This will provide accurate customer profitability information to help set appropriate prices to recover costs and make better decisions.
Case classic pen company with extensionCaritAndersen
Classic Pen Company is facing issues with falling profitability and pricing pressures. It currently uses a traditional costing system that allocates overhead equally based on direct labor. An activity-based costing (ABC) system is implemented to better reflect the actual overhead usage of different products. The ABC analysis identifies key activities and their cost drivers. It determines Red and Purple pens have significantly higher overhead costs than reported previously. The new income statement using ABC shows lower profits and some unprofitable customers.
Classic pen company activity based costingHarish B
Classic Pen Company is analyzing its cost accounting system using activity-based costing to better understand profitability. Previously, all overhead costs were allocated based on direct labor, but ABC analysis identified drivers like setup time and production runs. This showed that red and purple pens have higher costs than indicated previously due to more setups. ABC cost per unit for red and purple exceeds their selling price, suggesting price increases are needed to improve profitability for those products.
Reliance Baking Soda is Stewart Corporation's oldest and most established product. The new Domestic Brand Director needs to create a 2008 marketing budget that delivers a profit increase of 10% over 2007 levels. She must first evaluate the effectiveness of past consumer and trade promotions and determine if a price increase will have net bottom line benefits. Then she must decide on the optimal allocation of her marketing budget, taking into account the brand's apparent "cash cow" role in the Household Division of Stewart Corporation. Students are expected to complete a quantitative assignment: create and defend a budget.
Som case study - dont bother me i cant copeRajendra Inani
The document analyzes two production lines, Line A and Line B, that are currently producing below desired levels. For Line A, hiring two additional workers and running two hours of overtime daily is recommended to increase production from 315 to 420 units per day. For Line B, hiring one additional worker and running one hour of overtime is recommended to increase production from 140 to 210 units per day. Both solutions maintain over 85% efficiency while meeting production goals with minimal additional costs.
The document discusses Dell's direct sales model and competitive strategy. It summarizes Dell's history and growth founded on direct sales to customers. It analyzes Dell's competitors who struggled to copy the direct model. The document also reviews Dell's market share, competitive strengths, and provides recommendations to expand products, markets, and diversify through acquisitions for long-term growth.
Aqualisa Quartz - Simply A Better Shower (HBR Case Study)Arjun Parekh
The document discusses Aqualisa's Quartz shower valve which was intended to improve on existing shower technologies but struggled initially. It provides details on the UK shower market, Aqualisa's distribution channels, and the development of the Quartz valve. While the Quartz valve had technological advantages, plumbers were wary of innovation and it was priced too high. As a result, few units sold in the first few months through trade shops and showrooms.
Starbucks was facing declining customer satisfaction due to perceived issues like prioritizing profits over experience and slower service times. While it was highly successful initially by focusing on quality coffee and atmosphere, the brand was seen as less trendy and partners were providing unsatisfactory service. It is recommended that Starbucks invest $40 million to improve partner training and speed of service to convert satisfied into loyal customers. Converting just 46 more customers per store per day to highly satisfied would allow the investment to break even.
The Walt Disney: The Entertainment KingAnuj Poddar
This case is comprised of the company's history, from 1923 to 2001. The Walt years are described, as is the company's decline after his death and its resurgence under Eisner, some topics are devoted to Eisner's strategic challenges in 2001: managing synergy, managing the brand, and managing creativity. The case was written by Michael G. Rukstad and David Collis
The case was uploaded with a Walt Disney font, but Slideshare was not able to detect that
HubSpot is a leader in inbound marketing but seeks to accelerate growth and increase profits. It currently has 1,000 customers but high customer acquisition costs. The document proposes segmenting customers into Owners and Marketers and adjusting pricing plans. For Owners, it suggests incentivizing use of CMS and annual contracts. For Marketers, it recommends focusing on analytics, raising prices, and demonstrating inbound marketing success. New pricing forecasts increased lifetime profits per customer for both segments.
Kanpur Confectionaries Private Limited (KCPL) is a biscuit manufacturing company that was once successful but is now struggling with increased competition and underproduction. It is considering various options to return to profitability, including accepting a contract manufacturing offer from a competitor or focusing on supplying canteens. The best option is determined to be focusing on canteens as it satisfies the company's objectives of eliminating losses, maintaining brand identity, and adhering to family principles, while also providing opportunity for growth. An action plan is outlined to target premier institutes and increase KCPL's low market share of canteen demand.
Atlantic Computer manufactures servers and high-tech products. It dominates the traditional server market but seeks to enter the growing basic server market. It developed the Tronn server and PESA software to accelerate Tronn's speed by 4 times. Atlantic must determine pricing for the Tronn-PESA bundle. Four options are analyzed: 1) include PESA for free 2) price competitively against main rival Ontario 3) use cost-plus pricing 4) value-in-use pricing sharing savings. The analysis recommends value-in-use pricing to demonstrate value to customers while allowing for potential profit sharing that benefits both parties.
Classic knitwear and Guardian: A Perfect Fit?ArielJimenez36
This document discusses a decision facing Classic Knitwear about whether to partner with Guardian to launch a new line of insect repellent knitwear. Classic Knitwear specializes in manufacturing unbranded casual knitwear, while Guardian is a brand of insect repellent popular with outdoor enthusiasts. The partnership could help Classic differentiate its products and improve its low gross margins of 18%. However, there are risks around whether the new product line would sell well and whether it aligns with Classic's strategy. The document analyzes different options for the partnership and their pros and cons.
Harrah's Entertainment, Inc. Case Analysismbartugs
Harrah's Entertainment needs to decide how to attract new customers, retain existing customers, and regain lost customers while facing competitive pressures. It has strengths in strategic focus, 100% profit growth year-over-year, and strong marketing targeting specific customer segments. Harrah's has 18 casino locations, competitive pricing, and a loyalty program with 15 million members. However, aging facilities and increasing competition pose weaknesses and threats as competitors invest in newer, superior venues and technology like player cards and internet gambling expands.
Clique Pens - Case Study Solution by Kamal Allazov (Essay type)Kamal Allazov (MSc.)
Clique Pens Case Study by Harward Mba Center. This paper introduces possible solutions and recommendations by MSc. Marketing student - Allazov Kamal. (https://allazov.org/)
Wal-Mart has been able to sustain its competitive advantage and superior performance over the years through several factors:
1) Efficient distribution capabilities and low-cost partnerships with suppliers
2) Advanced data collection and analysis to improve demand forecasting
3) A customer-oriented workforce culture focused on low prices and continuous improvement
4) Maintaining everyday low prices (EDLP) to increase customer satisfaction and loyalty
To continue this success, Wal-Mart should focus on cost leadership through large scale operations and private label brands, address public relations issues, and enhance worker benefits to protect its reputation.
Nucor is considering building a new steel mill. The CEO is concerned about committing to the project given resource constraints and whether CSP technology will remain viable long-term. An analysis of Nucor's strengths in administration, employee relations and operations was presented. Weaknesses, opportunities, and threats in the US steel market were also reviewed. Nucor will decide on the project based on criteria requiring 100% commitment of previous capital, 25% ROA within 5 years, and maintaining debt-equity below 30%.
Montreaux Chocolate aims to introduce a new line of premium dark chocolates in the US market. After generating 45 initial ideas and screening them down to 12 fruit-based concepts, they developed 4 refined dark chocolate concepts containing 70% cocoa with flavors like blueberry, pomegranate, and cranberry. These would be offered in a 3.5 oz candy bar and 5 oz stand-up pouch, priced at $4.49, and distributed through supermarkets, drug stores, and convenience stores nationwide. Market research with 200 consumers on each concept was positive, and Apollo's large size, growing market share, and focus on health positions them well to successfully launch this new product line.
Activity-based costing (ABC) is a costing methodology that assigns overhead costs to products and services based on their actual consumption of activities like production, storage, delivery etc. It was developed in the 1980s as a response to the limitations of traditional costing systems in assigning overhead costs. ABC identifies activities in an organization and assigns the costs of each activity to outputs using cost drivers. It provides more accurate product costs than traditional costing and helps management understand overhead costs better. While it requires more initial costs and maintenance than traditional costing, ABC supports performance management and decision making.
Q.2 steps required to implement ABC within the companyABC Costing .pdfanjalipub
Q.2 steps required to implement ABC within the company
ABC Costing is a supplemental method of cost accounting that provides the decision-making
information absent from traditional costing methods. While ABC costing is not limited by
business unit boundaries, it can not fully supplant traditional costing methods as it often fails to
meet financial reporting requirements for businesses.
ABC Costing focuses on costs contributing to production of a product. It does not attribute other
general costs that do not have at least an indirect relationship to the product. While traditional
costing systems focus on direct costs and burden a product with other fixed costs, activity based
costing increases accuracy of indirect cost assignment.
In their 1999 book, Managerial Accounting, Garrison and Noreen identify six core steps to ABC
costing implementation.*
Implementation Steps
Step #1: Activity Identification
First, activities must be identified and grouped together in activity pools. Activity pools are the
supporting activities that tie in to a product line or service These pools or buckets may include
fractionally assigned costs of supporting activities to individual products as appropriate during
the second step.
Step #2: Activity Analysis
ABC continues with activity analysis, clearly identifying the processes which support a product
and avoiding some of the systemic inaccuracies of traditional costing. ABC costing requires
activity analysis, similar to the process mapping found in lean manufacturing.
This activity analysis identifies indirect cost relationships and allows assignment of some
percentage of that activity to an end product directly.
Step #3: Assignment of Costs
Based on the findings of step #1 and #2, costs are assigned to an activity pool. For example,
human resources costs would be assigned to indirect administrative or indirect management
costs. These pools will each have some contribution to object cost.
Step #4: Calculate Activity Rates
Initial analysis may include direct labor hours, or indirect support labor. These activities must be
assigned a value in real currency. All weightings must be added at this step. For instance,
production labor hours should be in terms of a weighted labor rate including benefit costs.
Step #5: Assign Costs to Cost Objects
Once activity costs, pools and rates are identified and clearly defined, the next step is to assign
them to cost objects. Objects are generally defined as the results offered to a customer. In both
manufacturing and non-manufacturing environments, this product should have some saleable
value to compare to the assigned costs.
Step #6: Prepare and Distribute Management Reports
Once ABC costing analysis is complete, that cost data should be placed in a concise and coherent
manner for cost object and process owners. This communication of the costing analysis is critical
to justify the cost of the analysis, as often this is not an inconsequential cost.
Q.3our classifications of the ABC .
The document discusses unit based costing (UBC) implemented at Hindustan Petroleum Corporation Ltd. UBC accumulates overhead costs for different organizational units and then assigns costs to products/services based on their use of activities in each unit. The key units considered are Fuel Refinery, Lube Refinery, and Captive Power Plant. UBC aims to provide more accurate product cost estimates for management decision making compared to traditional cost accounting. It involves identifying overhead costs like utilities, employee costs, maintenance etc. and allocating them to units based on cost drivers.
The document discusses pricing strategies for bureaus to charge clients for auto enrollment services. It outlines three pricing strategies - a tiered pricing strategy with different packages and price points; a monthly retainer fee to cover ongoing auto enrollment tasks; and a price list that breaks down each auto enrollment process and service. It emphasizes the importance of communication, consultation, automation through payroll software, and having realistic prices. The document also describes how BrightPay payroll software can help bureaus by automating and streamlining auto enrollment tasks like assessments, enrollments, communications, and ongoing monitoring.
Few people would start a journey with a map that shows neither where they are nor where they are going. Yet many companies seek to compete without knowing the true cost, and profit, of their products or services, and customers.
Directors often base corporate strategy on misleading information that supports bad decisions. This only helps competitors. Traditional financial information systems measure a company’s performance only in the aggregate.
They may not help to find opportunities to increase competitiveness in the market place.
To create more value and enhance their profitability, organisations in manufacturing and service require accurate information on costs. Activity Based Costing (ABC) can provide it. But organising an effective ABC initiative is not as simple as opening a book and beginning at Chapter One.
Group 11 presented information on cost accounting. The objectives of cost accounting are to advise management on cost-efficient actions, help with operations direction and control, and provide immediate information on inventory. Costs are classified as direct, indirect, variable, fixed, semi-variable, or chunky based on their behavior when activity changes. Direct costs are specifically related to a product while indirect costs are not directly tied to a product. Cost centers and cost drivers are used to assign indirect costs in a two-stage process. Designing an effective cost accounting system requires determining the appropriate number of cost centers and how to assign costs to products.
The Clean Air Act was passed in 1970 to regulate air pollution in the United States. It established national standards for air quality and emissions. The law aimed to reduce air pollution through enforcement of stricter standards for coal plants, factories, and vehicles. It has been amended several times to address economic and technological feasibility concerns while still pursuing air quality goals. Overall, the Clean Air Act has significantly improved air quality in the U.S. since its passage.
Activity-based costing (ABC) is a system that can be used in supply chain management and logistics to optimize costs. ABC breaks down overhead costs across activities like production and supply chain management. It assigns costs to each activity to get a clearer picture of where money is spent. Using ABC, businesses can see which products are truly profitable and identify opportunities to reduce overhead costs, helping to improve overall supply chain economics and competitiveness.
Chapter 11 : Activity Based Costing and Accounting InformationPeleZain
Activity-based costing (ABC) is a methodology that assigns overhead costs to products and services based on their use of activities and resources. It involves identifying costs, loading secondary and primary cost pools, measuring activity drivers, allocating costs between pools, charging costs to cost objects, formulating reports, and acting on the information. ABC provides a more precise allocation of overhead costs than traditional methods by recognizing the causal relationships between costs, activities, and products or services.
Three simple but effective automatic enrolment pricing plansRachel Hynes
The price that a bureau will set for processing auto enrolment (AE) is an important business decision.
This guide reveals the options available to help you make the right choice for YOU.
For more information visit www.brightpay.co.uk
Managing Business Operations (MBO) Report - Cost: the price of value creationNeha Kumar
This document summarizes initiatives by Schneider Electric to create value for customers. It discusses Schneider's Customer Order Tracking System (COTs) which allows customers to track order status online, reducing time and effort. It also discusses making enclosures available in kit form for easier assembly and transport. A new "Smart Rack" product was launched targeted at the price-sensitive channel market. The document argues that while these initiatives incur some additional costs, they enhance the customer experience and create value through benefits like reduced time, effort and anxiety for customers.
The document discusses activity-based costing (ABC), a method that assigns costs to products and services based on the activities consumed by each. It provides a 4-step process for ABC implementation: 1) identify activities, 2) assign resource costs to activities, 3) identify outputs, and 4) assign activity costs to outputs using cost drivers. ABC aims to more accurately determine costs by tracing them to specific causes like production activities rather than allocating overhead broadly.
Traditional costing systems are not effective for factories that produce multiple products. Activity-based costing (ABC) systems link resource costs to the activities required to produce goods and services. A multi-product factory requires more activities like scheduling, purchasing, and setups compared to a single-product factory. ABC systems assign indirect costs to products based on their demand on different activities, providing more accurate cost information than traditional systems.
This document discusses several accounting concepts and terms. It begins by describing the key differences between financial and managerial accounting and how this impacts the types of information gathered and reported. It then discusses direct and indirect costs, activity-based costing, value-added processes, and cost-volume-profit analysis. The document provides examples and explanations of these terms to illustrate their meanings and applications.
The new cost system identifies activities in the organization and assigns costs to products according to actual consumption. Hrudicka believed the existing standard costing system did not accurately trace costs of serving customers. It pooled costs into large expense buckets and allocated arbitrarily. ABC provided more trusted cost and profitability data to make effective decisions. Elkay launched pilots of the new Discrete Product Costing system and trained managers to improve processes and pricing.
Activity-based costing (ABC) is a method for determining accurate product costs by assigning indirect costs to products based on their use of activities, rather than volume-based metrics. ABC provides more accurate cost information which helps companies understand product profitability and competitive advantages. It also provides incentives to control indirect costs by tying them to specific activities. The chapter explains ABC and its benefits over traditional volume-based costing, and provides an example of its successful implementation at the US Postal Service.
The document discusses where to build a product/service cost model - within a planning tool or actuals-tracking systems. It recommends building the cost model within the planning tool first as this allows investment-based budgeting and setting rates for the upcoming year. While actuals-tracking systems can show revenues and expenses, a cost model there is only needed to analyze specific product/service profitability for efficiency improvements. The best approach is to start with cost modeling in the planning tool, then use those rates for invoicing and governance, and optionally replicate the cost model in actuals-tracking systems later.
1) Activity-based costing (ABC) is a cost accounting method that allocates overhead costs to products and services based on their actual consumption of resources instead of traditional methods that use less accurate cost drivers.
2) Target costing is a process that sets a target cost for a product by subtracting the desired profit margin from an estimated selling price and then works to reduce costs to meet the target.
3) Life-cycle costing tracks and accumulates all costs associated with a product or service over its entire lifetime from design through disposal to determine total profitability.
Activity Based Profitability ManagementMiguel Garcia
Activity Based Profitability Management (ABPM) and Activity Based Budgeting (ABB) offers organizations a complete tool to gain a competitive advantage and provides crucial information to support the process of making strategic and operational decisions in the current business environment. It might seem that having this type of information for the management of profits, costs and budgets is not necessary to implement Digital Transformation solutions because the implementation of new technologies does not require an evaluation of this type, and it is assumed that it must be implemented independently of what it implies and at any cost, but this is an error because it will always require business processes, products or services, customers or users, service channels, etc. that must be evaluated from the financial and business process point of view, implemented, measured and improved within a competitive and market environment. In this sense, the profitablitiy, cost and budget information provided by the approach of ABPM and ABB will lead to better business decisions that significantly increase the performance and profits of the companies.
2024's Top Chief Revenue Officers to Follow.pdfTHECIOWORLD
He exemplifies this approach by his unshakable commitment to generating results and his relentless drive, as evidenced by his over 15 years of experience in the industry. As an accomplished professional in the diversified industry of telecommunications, his story illustrates the power of enthusiasm and tenacity to propel success.
As a Carbon footprint consultancy in Agile Advisors, measuring each person's carbon footprint aims to make each person responsible for their share of greenhouse gas emissions. It seeks to persuade people to live more sustainably and make decisions that benefit the environment. However, businesses and large-scale commercial activities are the primary sources of most of the world's greenhouse gas emissions rather than private individuals. The Intergovernmental Panel on Climate Change (IPCC) estimates that roughly 100 enterprises globally account for over 70% of carbon dioxide emissions. This startling figure shows that no person's efforts can end the global catastrophe alone. However, on a smaller scale, our individual decisions do matter. Adopting sustainable practices by a group of people can have a cascading effect that affects more prominent organizations and changes policies. Ocean circulation and solar reflectance are two global-scale feedbacks that are linked to changes in the cryosphere.
Agile Advisors provides Carbon footprint consultancy In Dubai, the amount of carbon that exists on Earth remains constant. When dinosaurs walked the Earth millions of years ago, it was precisely the same as it is now. The atmosphere, oceans, and living things contain the remaining carbon, primarily stored in reservoirs or sinks, such as rocks and sediments. When plants and animals breathe, carbon is released back into the atmosphere. An essential component of all life on Earth is carbon—the fundamental element of life; carbon aids in forming living things' bodies. Its compounds form gases, liquids, and solids. While lowering one's carbon footprint is something that people should aim to do, addressing the structural problems that lead to climate catastrophe is also crucial. In order to contribute, governments, businesses, and other organizations must implement policies that support renewable energy, invest in environmentally friendly infrastructure, and control emissions from large enterprises.
We are Carbon footprint consultancy In UAE, Carbon dioxide, carbonate, and hydrogen carbonate comprise the bulk of inorganic carbon. Carbon is constantly moving in both directions between the organic and inorganic forms. Inorganic carbon is converted to organic carbon from its oxidized form when photosynthesis occurs. Airborne oxygen can oxidize organic carbon, mainly by respiration (breathing). The Earth's crust contains more than 99 per cent of the carbon involved in the carbon cycle. Most of this carbon is biological, having been deposited on the ocean floor by the skeletal remains of numerous marine animals that employ calcium carbonate to make their shells and skeletons. These deposits could eventually consolidate into limestone. The equilibrium between CO2 sources and sinks—sources release CO2, while sinks take in and store it—determines the amount of CO2 in the atmosphere.
This case study underscores upGrad's role in reshaping education through internet-driven innovation, illustrating its commitment to empowering learners and fostering career growth in the digital age.
#Digital Transformation
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#Industry-Relevant Programs
1. **Team Strength**:
- Seasoned discoverers with mineral finds of >$1Bn (silver), >42Mozs (gold), >12Blbs (copper)
- $8.75M recently raised for aggressive exploration
- 30% management ownership aligns interests
2. **High-Grade Discovery**:
- 2021 re-discovery: 75Moz at 980g/t AgEq (silver-zinc-lead)
- Objective: Prove continuity between high-grade discovery and existing gold-silver mine
- Potential for a gigantic, continuous deposit
3. **Proven Production Area**:
- Site of one of Alaska's first open-pit gold mines
- Existing 43-101 resource: ~500,000 oz AuEq, mostly indicated
4. **Carbonate Replacement Deposit (CRD) Advantages**:
- High grades, low mining costs
- Metallurgically simple, minimal environmental impact
- Strategic metals (Zn, Ga) could expedite permitting
5. **Massive Potential**:
- Two polymetallic deposits potentially linked
- Extensive mineralization corridor to be confirmed by drilling
Key Takeaway: High-grade discovery with potential for a giant, continuous CRD deposit, backed by a proven team and existing resources in a mining-friendly jurisdiction.
Honoring and Understanding the Significance of Guru PurnimaExotic India
In the oldest beliefs, it is believed that the day marks the first transmission of the Yogic sciences from Lord Shiva (The Adi yogi or first yogi) to his disciples, the ‘Saptarishi
An effective technical department at PMS is composed of a knowledgeable team of trained professionals who provide excellent design services as well as post-sale support. Due to the great quality of all of our products, they are all made to be very easy to construct and disassemble and are reasonably priced with appealing designs. We offer a wide range of products and services, such as designing and constructing distinctive floating pontoons.
Cracking the Corporate Social Responsibilty Code.pptxWorkforce Group
Corporate Social Responsibility (CSR) has evolved from a nice-to-have to a strategic imperative for businesses aiming for long-term success. Understanding and implementing effective CSR strategies can transform your organisation’s relationship with stakeholders, enhance its reputation, and contribute to its financial performance.
Implementing effective CSR strategies involves more than just philanthropic efforts; it requires a comprehensive understanding of your company's role in the community and the environment.
So, how do you approach Corporate Social Responsibility (CSR)?
In this deck you will learn the underlying concept of an effective Corporate Social Responsibility (CSR) strategy.
You’ll also learn
•The various types of CSR initiatives that exists
•Popular CSR strategies deployed by socially responsible organisations
•Tips for creating a socially responsible company.
Discover the power of virtual paralegals! Learn how to streamline your legal practice with remote paralegal support. This Slideshare presentation explores the benefits, roles, and essential skills of virtual paralegals. Optimize your workflow and boost efficiency.
India's Most Generative AI and Chatbot Service Providers to Follow 2024.pdfinsightssuccess2
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Many companies also provide tailored solutions for international moves, making them a valuable resource for expatriates and residents alike.
Virtual Production Tool Set and Technologies Redefining Cinema.pdfvirtualproduction38
Discover how Virtual Production Tools and cutting-edge tech are revolutionizing filmmaking! Unleash creative freedom with virtual sets and in-camera VFX.
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The Austin housing market has captured the nation's attention due to its rapid growth and dynamic changes. This vibrant city, known for its live music scene and tech industry, is facing both opportunities and challenges in its housing sector. For residents and potential buyers, understanding these complexities is crucial.
1. DAKOTA OFFICE PRODUCTS
CASE BACKGROUND
Dakota Office Products (DOP) is a merchandising company managed by John Malone,
the General Manager. DOP is a regional distributor of office supplies to institutions and
commercial businesses. The company had introduced the Electronic Data Interchange (EDI) in
year 1999 and a new Internet site in 2000. This is to provide convenience to customers in
making orders and delivery of products. The launching of electronic services was believed to
improve the company’s profit margin but despite of increase in sales, actual financial result of
operation for the year 2000 were reported to be Net Loss.
PROBLEM STATEMENT
What caused the loss of the company for the financial year 2000 and what actions must
it employ to gain back its profitability?
OBJECTIVES
1. To be able to understand the company’s current situation and be able to point out
possible reasons for the company’s net loss for the year.
2. To be able to recommend actions to aid DOP to gain back its profitability.
3. To be able to recognize the relationship of cost management and customer
profitability to proper pricing.
2. To appreciate ABC costing in a non-manufacturing company like DOP.
AREAS OF CONSIDERATION:
1. DOP is a retail business and thus its operating expenses (except cost of items purchased)
are all considered indirect costs.
2. Launching of Innovations: Desktop delivery option and EDI, new internet site created a
variety in product and customer demands. Customers are now given a choice between
commercial shipment delivery or desktop delivery option, between manual order process or
electronic data interchange. And this variety of services demand per customer affects
costing per customer. The current cost system failed to address this issue. This change,
innovation, has not yet been reflected in the company’s cost structure.
2. 3. Product Costing - With the introduction of desktop delivery option and EDI, operating
expenses are now overlapping among activities. We now have warehouse personnel
assigned as drivers to make desktop deliveries and manual order operator who also caters
the EDI orders. In this case, it must be noted that it is not very sensible to just total all the
expenses and spread it over all the activities especially when it is indirect costs. In the
current system of DOP, it assigned all warehouse, distribution and order entry as the same
for costing customer A and customer B (as seen in exhibit 1) which is not very acceptable. It
does not consider what services did A or B avail for the specific period.
The direct cost which is usually the cost of sales can easily be determined and assigned to
the product. But the cost of indirect overhead could not easily be determined and assigned.
Therefore, the company should use a costing system that is fitted to the business in
determining more relevant unit cost.
4. Understanding customer mix and its profitability
Customer A Customer B
Order Size Few large orders Many more orders
Order Placement Uses EDI Manual Order
Order Delivery Commercial Shipment Desktop delivery option
Time to pay bills Within 30 days 90 days or more
Ave A/R Balance $9,000 $30,000
Exhibit 1 – Differences between Customer A and Customer B
From this table, we compare customer A from customer B. Accordingly, Customer A utilizes
EDI and avails of the commercial shipment which attached a lower cost to it (EDI, less labor
hours for processing orders and cheaper cost of delivery if commercial). On the other hand,
Customer B orders manually and chooses desktop delivery option which cost a little higher
compared to its counterparts (Manual – longer time to process orders and additional
premium for desktop delivery). By this, we can determine that A is low cost-to-serve
customer while B is high cost-to-serve customer.
More importantly, in this table, we can understand that Customer A is a a good payor for it
can pay its bills in a shorter time compare to B. But this is where the problem arises, B being
the high cost-to-serve customer (meaning it has a higher cost of sale) is the one who cannot
contribute to company’s overall profit due to its relatively large A/r balance.
5. Product Pricing –DOP’s existing price system was a simple mark up over purchase price
(with a small premium for desktop delivery). This system assumed that DOP’s operating
expenses were proportional to the purchase costs of items it processed and delivered to
customers. It assigns 155 markup to purchased product cost to cover the warehousing,
distribution and freight which should not be the case. The pricing system failed to recognize
the cost that it incurred to serve its varied mix of customers. As customer variety increases,
3. a pricing scheme based on a standard markup fails to recover the cost incurred for high
cost-to-serve customers and perhaps overcharges low cost-to-serve customers.
ALTERNATIVE COURSES OF ACTION
1. Apply ABC costing system in the operation.
This alternative aims to develop an ABC costing model for DOP. There are two
considerations why DOP needs and ABC costing method:
a. All costs (except cost to purchase) are all indirect cost or support costs
b. High variety in product and customer demands
PROS:
1. Proper cost management - adapting ABC system will assign indirect cost properly per
activity. DOP will assign cost only to the customer that requires the activity for production. This
method eliminates allocating irrelevant costs to the products served to a customer. And
therefore can give more accurate profitability information (shown in exhibit 3).
2. More relevant information for easy interpretation of cost for internal management -
Information gathered using ABC system are more reflections of the true cost of the products
and services rendered to a customer since it assigns costs only relevant to a specific activity per
customer demand. This will enable DOP management to have a greater understanding of
overhead costs and aid in decision-making regarding pricing and costing a specific customer.
3. Allows to compute product line profitability and customer profitability, which permits the
company to make better decisions about your sales ‘mix’ and marketing efforts.
4. Helps the company set up a price structure that charges customers and clients according to
the support required for their particular situation. We call it ‘just in time’ pricing.
CONS:
1. Requires substantial resources in implementing the system. Once implemented, an
activity based costing system is costly to maintain. Data concerning numerous
activity measures must be collected, checked, and entered into the system.
2. ABC produces numbers such as product margins, that are odds with the numbers
produced by traditional costing systems. Management might find it hard to adjust
with the new costing system.
3. Activity based costing data can be easily misinterpreted and must be used with
care when used in making decisions. Costs assigned to products, customers and
other cost objects are only potentially relevant. Before making any significant
4. decision using activity based costing data, managers must identify which costs are
really relevant for the decisions at hand.
*Analysis part shows how ABC system can work in DOP costing structure
2. Stick to the current costing and pricing system.
Staying with the current system means not to change any costing application and
therefore pricing method as well. Meaning in costing, operating expenses will be spread
throughout all customers disregarding if they will choose to order through EDI or
manual. Pricing will still be based on 15% markup on product cost.
PROS:
1. No adjustments to be done, therefore, no additional cost to be incurred.
CONS:
2. Indirect cost will still be spread over all activities and therefore not allocating it
properly.
3. The wrong costing per customer will continue and the income statements in the years
to come will be either understated or overstated.
SUPPORTING ANALYSIS
Below is the proposed ABC model to be used in costing orders.
5. - Freight is a direct cost to all customers who opt commercial shipments of orders.
- Warehouse, rent and depreciation is a direct cost to all customers.
- Warehouse distribution personnel is an indirect cost. It must be spread over
ordinary customers and customer who choose desktop delivery. This is supported by
the fact the warehouse personnel also do delivery services. 90% for nondesktop
delivery option (75,000 cartons/85,000 cartons) and 10% for desktop delvery option
(5,000/85,000 cartons) rounded off.
- Delivery truck expenses is direct cost to all customers who opt for desktop delivery
option.
For order entry, cost are allocated as to manual, EDI and entering individual order
lines per order. Cost driver is based on time distribution per activity. Process manual
custom order 20% (10,000 hrs/ 2,000 hrs), enter items ordered 75% (10,000/7500)
and EDI 5% (10,000 hrs/500hrs).
-We divide the cost per activity to number of units affected by the said activity.
6. We now compute the customer profitability
This shows a more accurate customer profitability for both Customers A and B. Using
the ABC system, we assigned cost per activity that is unique to a specific customer. In
this case for instance, we do not assign any cost of EDI order placement to Customer B
for it did not avail of the said feature.
RECOMMENDATION
Recommended alternative is Alternative 1 – Implement the ABC system model for
costing. In this way, costing can be made properly as to reflect the true costs per customer. And
proper pricing will follow in the sense that higher price must be given to high cost-to-serve
customers and also it can propse a more strict collection of receivable especially for this high
cost-to-serve customers.
CONCLUSION
With innovations there is change. Change in variety of product and services that can be
demanded by customers. And this change entails additional cost. With additional cost
comes a need to modify pricing strategy to better cover up the added cost. With pricing
comes the need to understand customer and their profitability. And with right costing
comes right pricing and profitability is the end result. In the case, the net loss for the
financial year 2000 can be greatly pointed out to the improper costing method DOP
employed. It spread it indirect cost over all the customers disregarding the customer
mix it created when it introduced the innovations on its operations. It must be noted
that change in product costing must be well addressed in the company’s cost structure.
7. This is what DOP failed to incorporate. It caused the company to disregard the
customer. And recommending and implementing ABC system will answer this change in
cost structure. It was raised in the analysis that DOP indeed needs ABC system for two
basic concerns: (1) All costs (except cost to purchase) are all indirect cost or support
costs and (2) High variety in product and customer demands. With these concerns,
employing ABC system will result in more accurate costing and pricing of products and
when information from this will be used accordingly, the end result of profitability will
follow.
POTENTIAL PROBLEM ANALYSIS
There are threats or potential problem that may arise in implementing ABC costing
procedure of the company as stated below:
1. Additional cost will be incurred in the launching of ABC system
2. Difficulty in adapting the ABC system in its initial implementation stage
3. Change in pricing strategy may affect the market