Dakota Office Products (A) Dakota Office Products Company priced its products to the customers by marking up the purchased product cost by about 15% to cover the cost of warehousing, distribution, and freight, and adding another markup to cover the approximate cost for general and selling expenses, and profit. This pricing system was inadequate for its current operating environment since each customer required different product ordering and distributing ways which cost differently.
Moreover, according to the case scenario, we know that those costs that were considered in product pricing strategy were not accurately assigned to each order and needed to be finely reallocated. So, in order to set up a better pricing system for the company and help figuring out its current business operation issue, we need to analyze its cost and profitability using the Activity-Based Costing method. (B) Distribution of Resource Consumption across DOP Activity Cost Pools: DOP ActivitiesActivity Cost Pools
Process CartonsShip CartonsDesktop DeliveriesManual Customer OrdersEnter individual order linesProcess EDI/internet ordersTotal Warehouse Expense(excluding personnel)100%0%0%0%0%0%100% Warehouse Personnel Expense90%0%10%0%0%0%100% Freight0%100%0%0%0%0%100% Delivery Truck Expenses0%0%100%0%0%0%100% Order entry expenses0%0%0%20%75%5%100% First-Stage Allocations to DOP Activity Cost Pools DOP ActivitiesActivity Cost Pools
Process CartonsShip CartonsDesktop DeliveriesManual Customer OrdersEnter individual order linesProcess EDI/internet ordersTotal Warehouse Expense(excluding personnel)$2,000,000$0$0$0$0$0$2,000,000 Warehouse Personnel Expense$2,160,000$0$240,000$0$0$0$2,400,000 Freight$0$450,000$0$0$0$0$450,000 Delivery Truck Expenses$0$0$200,000$0$0$0$200,000 Order entry expenses$0$0$0$160,000$600,000$40,000$800,000 Total$4,160,000$450,000$440,000$160,000$600,000$40,000$5,850,000 DOP Activity Rates: Activity Cost PoolsTotal CostTotal ActivityActivity Rate Process Cartons$4,160,00080,000cartons$52per carton Ship Cartons$450,00075,000cartons$6per carton
Desktop Deliveries$440,0002,000deliveries$220per delivery Manual Customer Orders$160,00016,000manual orders$10per manual order Enter individual order lines$600,000150,000lines$4per line Process EDI/internet orders$40,0008,000EDI/internet orders$5per EDI/internet order (C) Customer ACustomer B Cartons ordered200200 Shipping200150 Desktop deliveries025 Manual customer orders6100 Individual order lines60180 EDI orders60 Average accounts receivable$9,000 $30,000 Customer Profitability Report (ABC method) Customer ACustomer B Sales$103,000 $104,000 Costs Cartons ordered$10,400 $10,400 Shipping$1,200 $900 Desktop deliveries$0 $5,500
Manual customer orders$60 $1,000 Individual order lines$240 $720 EDI orders$30 $0 Interest expense$900 $3,000 Total Cost$12,830 $21,520 Contribution to general and selling expenses, and profit$90,170 $82,480 As we look at the new customer profitability report above, we can clearly see that the accounting contribution margin values rise from $5,250 to $90,170 in Customer A and from $6,250 to $82,480 in Customer B under ABC method. When carefully looking at each cost assigned to the customers, it varies significantly between Customer A and B due to their different product ordering and delivery service they had.
Though these two customers ordered the same amount of cartons, Customer B obviously preferred in ordering products through paper or phone which require manual data entry, and B also incurred an expensive desktop delivery cost, while Customer A had chosen relatively cheaper ways in ordering and shipping products. Besides, Customer B placed many more orders with a smaller average size, and this definitely cost more in manual data entry expense. Furthermore, since Customer B took a longer time to pay its bills, it had an average accounts receivable almost three times greater than that of Customer A, so does the cost of its interest expense.
Therefore, these differences in costs caused a difference in profitability between these two customers. However, there are still some limitations existing in our analysis. Though the company added another markup to cover the approximate cost for general and selling expenses and profit, the amount of that expenses were still significant enough to be looked at and needed to be further dissected and analyzed to get a better view in allocated cost of each order. There must be some direct cost in general and selling expenses needed to be allocated in different orders.
To generate a more precise and valuable profitability report, more detailed information is needed in analysis. (D) If a major customer switched from placing all its orders manually to placing all its orders over the internet site, the activity rate of setting up manual customer order and entering individual order lines would go down whereas the rate of validating internet order would increase. This switch might decrease the order entry expenses since less time is needed in data ntry activity because of the convenience of internet ordering. Therefore, it would gain in the net income value. Then the company would have more capacity in data entry and can modify its utilization of human resource in the business structure. (E) Implications of Time-Driven Activity-Based Costing for the DOP case According to the article, Time-Driven Activity-Based Costing, the traditional ABC which has been using by the Dakota Office Products can be sometimes difficult in giving accuracy.
The process of interviews and employees surveys used in the traditional ABC is not efficient because they take time and money to implement, and also can be sometimes imprecise. In addition, the traditional ABC is sometimes unsuccessful at capturing the complexity of some activities. So according to Robert S. Kaplan and Steven R. Anderson, the new ABC model, time-based costing, can allow the Dakota Offices products to better allocate their costs and identify important cost and profit enhancement opportunities.
It will also allow them to eliminate the cost that they use in their interview process and surveys. In fact, time-based ABC decrease the amount of data needed and only focuses on the applied capacity of assigned resources and their cost, and the unit times required to perform transactional activities. For example, for the cost per time per unit of capacity, managers could instead of surveying employees on how they spend their time can simply estimate the percentage of capacities. Then for the unit times of activities, they could also estimate how long it takes to complete one unit of an activity.
Then, the deriving cost driver rates will be calculated by multiplying the estimate cost per times unit of capacity by the estimate unit times of activities. Then, in the analysis, managers will be able to report their cost on ongoing basis where they will be able to see the costs of a business’s activities as well as the time that they spend on them. This way, for the case of the Dakota Office Products, managers will be able to know why they are not making enough profits and will be able to better allocate their cost to become more efficient.
