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.
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.
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.
A marketing Case Study of Natureview Farm, an organic yogurt manufacturer. This analysis was performed by E. Santhosh Kumar, IIT Madras, during an internship with Prof. Sameer Mathur, IIM Lucknow.
Aqualisa Quartz - Simply A Better Shower (HBR Case Study)Arjun Parekh
Probable Solution to HBR Case on Aqualisa Quartz. The Presentation consists of info about Channel Distribution, Development of Quartz Shower Valve, UK Shower Market, Initial Sales Results, 4Ps of Marketing for Aqualisa, A shift in Marketing Strategy.
ATLANTIC COMPUTER: A BUNDLE OF PRICING OPTIONS Akshay Jain
There are four main types of pricing strategies from which Atlantic Computers canchoose. First, Atlantic Computers could stay with the status quo and offer software tools for free. Second, it could choose competitive based pricing. Third it could choose from Cost-plus pricing. Finally, it could choose value-in use pricing.In addition to determining which pricing strategy to use, Atlantic
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 .
A marketing Case Study of Natureview Farm, an organic yogurt manufacturer. This analysis was performed by E. Santhosh Kumar, IIT Madras, during an internship with Prof. Sameer Mathur, IIM Lucknow.
Aqualisa Quartz - Simply A Better Shower (HBR Case Study)Arjun Parekh
Probable Solution to HBR Case on Aqualisa Quartz. The Presentation consists of info about Channel Distribution, Development of Quartz Shower Valve, UK Shower Market, Initial Sales Results, 4Ps of Marketing for Aqualisa, A shift in Marketing Strategy.
ATLANTIC COMPUTER: A BUNDLE OF PRICING OPTIONS Akshay Jain
There are four main types of pricing strategies from which Atlantic Computers canchoose. First, Atlantic Computers could stay with the status quo and offer software tools for free. Second, it could choose competitive based pricing. Third it could choose from Cost-plus pricing. Finally, it could choose value-in use pricing.In addition to determining which pricing strategy to use, Atlantic
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 dilemma of how much to charge your payroll clients for the additional AE work is fast becoming a hot topic!
There seems to be a certain degree of secrecy surrounding the pricing as nobody is quite sure how to charge. One critical issue is to make sure that the pricing strategy allows the bureau to be profitable.
While there is no magical formula to achieve this, we will examine three unique pricing strategies that are both practical and realistic.
For more information visit www.brightpay.co.uk.
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.
ABC Manufacturing Company
Rhoda Shugars
SCM210-1404B-04: Introduction to Logistics/Supply Chain Management
Chester Legenza
December 16, 2014
Introduction:
Assembling firms confront always expanding rivalry in today's worldwide commercial center. Organizations must respond rapidly and fabricate superb, minimal effort items to be effective in this new environment. To settle on fitting choices, senior supervisors must have exact and up-dated costing data. Customary costing frameworks focused around volume-based designation of overhead have lost pertinence in an assembling environment that has seen a sharp increment in overhead and a resulting decrease in immediate work. These customary costing frameworks have a tendency to contort item expenses and lead to poor key choice making (Johnson and Kaplan; Johnson).one inventive costing strategy intended to manage the inadequacies of conventional costing frameworks is Activity Based Costing (ABC). ABC, spearheaded by Robin Cooper, Robert Kaplan, and H. Thomas Johnson (Cooper, Cooper and Kaplan, Johnson), is a costing procedure used to follow overhead expenses specifically to cost objects, i.e., items, methods, administrations, or clients and help administrators to settle on the right choices in regards to item blend and focused systems. As indicated by Turney, ABC can drastically change how chiefs focus the mix of their product offering, value their items, recognize the area for sourcing parts, and survey new engineering (Turney). Despite the fact that the writing has reported, Various executions of ABC in vast assembling firms, there has been restricted bookkeeping of ABC being grasped by little and medium assembling firms (Needy and Bidanda; Bharara and Lee). Upon closer examination, there seems, by all accounts, to be a few components avoiding little and medium assembling firms from executing an ABC costing framework including absence of information, specialized assets, budgetary assets, and satisfactory computerization. Maybe the fundamental impediment, absence of information, focuses on the issue of gathering and handling the required information in the right arrangement at a sensible expense. Since the data required for ABC is exorbitant and particularly little assembling firm sari commonly compelled fiscally, these organizations need to be extremely specific in the kind of information and examination that they use to focus overhead expenses. In addition, little organizations work exceptionally, a condition alluded to as asset destitution that obliges particular expense administration methodologies (Welsh and White). Accordingly, a philosophy that will empower a little organization to acquire precise item cost data yet minimize monetary exertion is required.
Decision-Making Criteria:
Cooper depicts two stages in the ABC model (Cooper,; Cooper,). In the first stage, expenses are allocated to cost pools inside a movement focus, taking into account an expense driver. There is no proportiona.
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
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.
Enterprise Excellence is Inclusive Excellence.pdfKaiNexus
Enterprise excellence and inclusive excellence are closely linked, and real-world challenges have shown that both are essential to the success of any organization. To achieve enterprise excellence, organizations must focus on improving their operations and processes while creating an inclusive environment that engages everyone. In this interactive session, the facilitator will highlight commonly established business practices and how they limit our ability to engage everyone every day. More importantly, though, participants will likely gain increased awareness of what we can do differently to maximize enterprise excellence through deliberate inclusion.
What is Enterprise Excellence?
Enterprise Excellence is a holistic approach that's aimed at achieving world-class performance across all aspects of the organization.
What might I learn?
A way to engage all in creating Inclusive Excellence. Lessons from the US military and their parallels to the story of Harry Potter. How belt systems and CI teams can destroy inclusive practices. How leadership language invites people to the party. There are three things leaders can do to engage everyone every day: maximizing psychological safety to create environments where folks learn, contribute, and challenge the status quo.
Who might benefit? Anyone and everyone leading folks from the shop floor to top floor.
Dr. William Harvey is a seasoned Operations Leader with extensive experience in chemical processing, manufacturing, and operations management. At Michelman, he currently oversees multiple sites, leading teams in strategic planning and coaching/practicing continuous improvement. William is set to start his eighth year of teaching at the University of Cincinnati where he teaches marketing, finance, and management. William holds various certifications in change management, quality, leadership, operational excellence, team building, and DiSC, among others.
Kseniya Leshchenko: Shared development support service model as the way to ma...Lviv Startup Club
Kseniya Leshchenko: Shared development support service model as the way to make small projects with small budgets profitable for the company (UA)
Kyiv PMDay 2024 Summer
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Business Valuation Principles for EntrepreneursBen Wann
This insightful presentation is designed to equip entrepreneurs with the essential knowledge and tools needed to accurately value their businesses. Understanding business valuation is crucial for making informed decisions, whether you're seeking investment, planning to sell, or simply want to gauge your company's worth.
RMD24 | Retail media: hoe zet je dit in als je geen AH of Unilever bent? Heid...BBPMedia1
Grote partijen zijn al een tijdje onderweg met retail media. Ondertussen worden in dit domein ook de kansen zichtbaar voor andere spelers in de markt. Maar met die kansen ontstaan ook vragen: Zelf retail media worden of erop adverteren? In welke fase van de funnel past het en hoe integreer je het in een mediaplan? Wat is nu precies het verschil met marketplaces en Programmatic ads? In dit half uur beslechten we de dilemma's en krijg je antwoorden op wanneer het voor jou tijd is om de volgende stap te zetten.
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Vat Registration is a legal obligation for businesses meeting the threshold requirement, helping companies avoid fines and ramifications. Contact now!
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Cracking the Workplace Discipline Code Main.pptxWorkforce Group
Cultivating and maintaining discipline within teams is a critical differentiator for successful organisations.
Forward-thinking leaders and business managers understand the impact that discipline has on organisational success. A disciplined workforce operates with clarity, focus, and a shared understanding of expectations, ultimately driving better results, optimising productivity, and facilitating seamless collaboration.
Although discipline is not a one-size-fits-all approach, it can help create a work environment that encourages personal growth and accountability rather than solely relying on punitive measures.
In this deck, you will learn the significance of workplace discipline for organisational success. You’ll also learn
• Four (4) workplace discipline methods you should consider
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• Three (3) key tips to maintain a disciplined workplace.
What is the TDS Return Filing Due Date for FY 2024-25.pdfseoforlegalpillers
It is crucial for the taxpayers to understand about the TDS Return Filing Due Date, so that they can fulfill your TDS obligations efficiently. Taxpayers can avoid penalties by sticking to the deadlines and by accurate filing of TDS. Timely filing of TDS will make sure about the availability of tax credits. You can also seek the professional guidance of experts like Legal Pillers for timely filing of the TDS Return.
LA HUG - Video Testimonials with Chynna Morgan - June 2024Lital Barkan
Have you ever heard that user-generated content or video testimonials can take your brand to the next level? We will explore how you can effectively use video testimonials to leverage and boost your sales, content strategy, and increase your CRM data.🤯
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3.0 Project 2_ Developing My Brand Identity Kit.pptxtanyjahb
A personal brand exploration presentation summarizes an individual's unique qualities and goals, covering strengths, values, passions, and target audience. It helps individuals understand what makes them stand out, their desired image, and how they aim to achieve it.
Digital Transformation and IT Strategy Toolkit and TemplatesAurelien Domont, MBA
This Digital Transformation and IT Strategy Toolkit was created by ex-McKinsey, Deloitte and BCG Management Consultants, after more than 5,000 hours of work. It is considered the world's best & most comprehensive Digital Transformation and IT Strategy Toolkit. It includes all the Frameworks, Best Practices & Templates required to successfully undertake the Digital Transformation of your organization and define a robust IT Strategy.
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RMD24 | Debunking the non-endemic revenue myth Marvin Vacquier Droop | First ...BBPMedia1
Marvin neemt je in deze presentatie mee in de voordelen van non-endemic advertising op retail media netwerken. Hij brengt ook de uitdagingen in beeld die de markt op dit moment heeft op het gebied van retail media voor niet-leveranciers.
Retail media wordt gezien als het nieuwe advertising-medium en ook mediabureaus richten massaal retail media-afdelingen op. Merken die niet in de betreffende winkel liggen staan ook nog niet in de rij om op de retail media netwerken te adverteren. Marvin belicht de uitdagingen die er zijn om echt aansluiting te vinden op die markt van non-endemic advertising.
"𝑩𝑬𝑮𝑼𝑵 𝑾𝑰𝑻𝑯 𝑻𝑱 𝑰𝑺 𝑯𝑨𝑳𝑭 𝑫𝑶𝑵𝑬"
𝐓𝐉 𝐂𝐨𝐦𝐬 (𝐓𝐉 𝐂𝐨𝐦𝐦𝐮𝐧𝐢𝐜𝐚𝐭𝐢𝐨𝐧𝐬) is a professional event agency that includes experts in the event-organizing market in Vietnam, Korea, and ASEAN countries. We provide unlimited types of events from Music concerts, Fan meetings, and Culture festivals to Corporate events, Internal company events, Golf tournaments, MICE events, and Exhibitions.
𝐓𝐉 𝐂𝐨𝐦𝐬 provides unlimited package services including such as Event organizing, Event planning, Event production, Manpower, PR marketing, Design 2D/3D, VIP protocols, Interpreter agency, etc.
Sports events - Golf competitions/billiards competitions/company sports events: dynamic and challenging
⭐ 𝐅𝐞𝐚𝐭𝐮𝐫𝐞𝐝 𝐩𝐫𝐨𝐣𝐞𝐜𝐭𝐬:
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Improving profitability for small businessBen Wann
In this comprehensive presentation, we will explore strategies and practical tips for enhancing profitability in small businesses. Tailored to meet the unique challenges faced by small enterprises, this session covers various aspects that directly impact the bottom line. Attendees will learn how to optimize operational efficiency, manage expenses, and increase revenue through innovative marketing and customer engagement techniques.
Personal Brand Statement:
As an Army veteran dedicated to lifelong learning, I bring a disciplined, strategic mindset to my pursuits. I am constantly expanding my knowledge to innovate and lead effectively. My journey is driven by a commitment to excellence, and to make a meaningful impact in the world.
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