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The Case Presentation of Managerial Accounting

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Presentation on theme: "The Case Presentation of Managerial Accounting"— Presentation transcript:

1 The Case Presentation of Managerial Accounting
Prepared by: group 6

2 Members of Group #6 Group 1 Members May - M977Z262 Jay - M977Z250
 Alan - M977Z227 Tomi – M977Z206 Drazen – M Candace - M Fah - M977Z223 Natko – M977Z205 Cindy - M

3 Outline There are 3 cases which are: Allied Office Products
Chalid Wines Data Services Inc.

4 Allied office products
The Case Study of Allied office products

5 Background In 1992, Allied Office Products was a corporation with annual sales of $900 million Since 1988, the company had expanded into business forms inventory management services. Allied embarked on a campaign to enroll its corporate client in a “TFC (Total Forms Control)” program. Annual TFC sales of $60 million in 1992. Forms manufacturing Business forms Specialty paper products, such as writing paper, envelopes, note cards, and greeting cards.

6 Background (cont’d) Business forms inventory management services – Total Forms Control (TFC) Warehousing Inventory financing Forms usage reporting Inventory control Distribution (pick pack and desk top delivery) Allied’s philosophy is “we know what you need…the right product at the right place at the right time.”  a well run warehousing & distribution network TFC inventory storage 10 distribution centers

7 Background (cont’d) Current pricing model
Clients charged flat fee on product cost, plus 32.2% of product cost to cover warehousing, distribution, cost of capital for inventory, and freight expense Sales margin Sales force charges average of 20% of product and services Individual accounts can vary from standard formula as shown in Exhibits 4 and 5. TFC projected ROI 6% (1992), down from ROI 20% (1988)

8 Background The Value Chain Concept – TFC
The Industry Chain Trees Pulp Paper Forms Mfg. Forms Sales TFC Customer Purchasing Manager Customer Receiving Forms User The TFC Chain Storage & Inventory Financing Requisitioning Stock Selection & Pick Pack Order Entry & Billing Desk Top Delivery Freight

9 Distribution Center Activity Analysis
Identified and reviewed six primary activities across five distribution centers Interviews with key staff Site Manager Warehouse Supervisor Data Entry Operator Conducted activity cost analysis Identify cost drivers

10 Storage and Inventory Financing Activity Analysis
“Don’t you think we should do something to get that old inventory moving?” - Tim, Kansas City, MO Distribution Facility Storage and inventory management of business form cartons Current cost - $1.55M Inventory obsolescence Excess inventory Current inventory – 350,000 cartons Cost of capital – 13% Customer does not pay for inventory until requisition submission

11 Requisitioning Activity Analysis
Processing of orders according to customer request Current cost - $1.801M 310,000 requisitions per year Each requisition averages 2.5 lines

12 Stock Selection / Pick Pack Activity Analysis
“Almost everything is pick pack nowadays. No one seems to order a carton of 500 items anymore.” – Rick Fosmire, Warehouse Supervisor Process of selecting cartons and partial cartons to meet customer orders Current combined cost - $1.495M Stock selection - $0.761M Pick pack - $0.734M 90% of all orders are pick pack

13 Order Entry and Billing Activity Analysis
“I’ve gotten to the point where I know the customers so well, that all the order information is easy. The only thing that really matters I how many lines I have to enter.” - Hazel Nutley, Data Entry Operator Entry of customer order information into computer system Current cost - $0.612M Labor intensive with all manual entry Requisitions submitted line by line

14 Desk Top Delivery Activity Analysis
Specialized delivery of orders to specific areas of customer’s location Current cost - $0.250M Premium service with no additional fees Average time to complete – 1.5 to 2 hours 8500 requests completed per year

15 Freight Activity Analysis
Cost of shipping orders to customer Current cost for $1.684M Charges based on a percentage of product cost, not actual utilization New computer system coming online to track individual freight charges

16 Exhibit 1

17 Exhibit 3: TFC Net Sales, 1991

18 Exhibit 4

19 Exhibit 5

20 Question 1: 1) Using the information in the text and in Exhibit 2, calculate “ABC” based services costs for the TFC business.


22 Breakdown of Expenses Activity Allocation
Cost Pools Value % Storage Expense $ 1,550,000 27.2% Requisition Handling Expense $ 1,801,000 31.6% Warehouse Activity $1,745,000 Basic Warehouse Stock Selections (44%) $ ,000 13.3% "Pick-Pack" Activity (42%) $ ,000 12.9% Desk Top Delivery (14%) $ ,000 4.4% Data Processing Expense $ ,000 10.7% Total $ 5,708,000 100.0%

23 Activity Based Cost Analysis Cost Drivers
Units Storage Number of Cartons 350,000 Requisition Handling Number of Requisitions 310,000 Basic Warehouse Stock Delivery Number of Requisition Lines 775,000 Pick Pack Number of Pick and Requisition Lines 697,500 Data Entry Desk Top Delivery Number of Desktop Deliveries 8500 Note: * Number of Requisition Lines = Number of Requisition x Requisition Average (2.5 lines) * Pick Pack Units = 90% x Number of Requisition Lines

24 Activity Based Cost Analysis Allocation
Total Cost Total Cost Driver Units Overhead Allocation Storage $1,550,000 350,000 $4.43 Requisition Handling $1,801,000 310,000 $5.81 Basic Warehouse Stock Delivery $761,000 775,000 $0.98 Pick Pack $734,000 697,500 $1.05 Data Entry $612,000 $0.79 Desk Top Delivery $250,000 8500 $29.41 Total $5,708,000 Note: * Overhead Allocation = Total Cost / Total Cost Driver Units

25 Question 2: 2) Using your new costing system, calculate distribution service costs for “Customer A” and “Customer B.”

26 Activity Based Cost Analysis
Cost Driver Customer A Customer B Storage Number of Cartons 350 700 Requisition Handling Number of Requisitions 364 790 Basic Warehouse Stock Delivery Number of Requisition Lines 910 2500 Pick Pack Number of Pick and Req. Lines Data Entry Desk Top Delivery Number of Desktop Deliveries 26

27 Activity Based Cost Analysis
Current Activity Based Customer A Activity Based Customer B Storage $1,550.50 $3,101.00 Requisition Handling $2,114.84 $4,589.90 Basic Warehouse Stock Delivery $891.80 $2,450.00 Pick Pack $955.50 $2,625.00 Data Entry $718.90 $1,975.00 Desk Top Delivery $0.00 $764.66 Subtotal ABC $10,250 $6,231.54 $15,505.56 Freight $3,500 $2,250 $7,500 Cost of Capital $2,350 $1,950 $6,500 Total $16,100 $10,432 $29,506 Note: * Activity Based Customer = Customer Cost x Overhead Allocation Cost of Capital = 13% x Customer’s Average monthly inventory balance Current Subtotal ABC = 20.5% x Product Cost Current Freight = 7% x Product Cost Current Cost of Capital = 4.7% x Product Cost

28 Activity Based Cost Analysis
Current Customer A Customer B Sales $79,320 Product Cost $50,000 Distribution/Services (32.2%) $16,100 ---- ABC $10,432 $29,506 Return on Sales ($) $13,220 $18,888 ($186) Return on Sales (%) 16.7% 23.8% -0.23%

29 Question 3: 3) What inference do you draw about the profitability of these two customers?

30 Return on sales to customer A equals 18,888$ = 23,8 % Customer B equals $ = -0,23% For the Allied Office Products it is much more profitable to work with customer A, because with the B customer, they are actually realizing loss This couldn’t been seen through the current accounting system When ABC was implemented, the costs for every customer can be known separately

31 Question 4: 4) Should TFC implement the SBP pricing system?

32 Service based pricing should be implemented
Every customer can be charged exactly for what they purchase Customers will be more satisfied with the service The company will know exactly what are the costs for every customer

33 Question 5: 5) What managerial advice do you have for Allied about the Total Forms Control (TFC) business? How does Exhibit 6 relate to this question?

34 Company Optimization Centralize data entry into single location Build a staffing model designed to reduce headcount, possibly by consolidating warehouses Modify compensation plan to help encourage sales behavior focused on growing customer revenue and profitability Implement Customer Profiling Program Initiate Just In Time Inventory (JIT) System with Allied (for 179 customers that represent 72% of sales) Incorporate purchase history into requisition process and establish autofill order process Introduce customer needs assessment and cross-sell initiative Reduce pick-pack orders: work with Allied to reconfigure cartons to meet top 40 accounts’ buying patterns

35 Thank You For Your Attention 

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