Presentation on theme: "The Case Presentation of Managerial Accounting. Members of Group #6 Drazen – M9770204 Natko – M977Z205 Cindy - M9770234 Jay - M977Z250 Alan - M977Z227."— Presentation transcript:
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.
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
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)
Background The Value Chain Concept – TFC TreesPulpPaper Forms Mfg. Forms Sales TFC Customer Purchasing Manager Customer Receiving Forms User Storage & Inventory Financing Requisitioning Stock Selection & Pick Pack Order Entry & Billing Desk Top Delivery Freight The TFC Chain The Industry Chain
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
Storage and Inventory Financing Activity Analysis 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 “Don’t you think we should do something to get that old inventory moving?” - Tim, Kansas City, MO Distribution Facility
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
Stock Selection / Pick Pack Activity Analysis 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 “Almost everything is pick pack nowadays. No one seems to order a carton of 500 items anymore.” – Rick Fosmire, Warehouse Supervisor
Order Entry and Billing Activity Analysis Entry of customer order information into computer system Current cost - $0.612M Labor intensive with all manual entry Requisitions submitted line by line “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
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
Freight Activity Analysis Cost of shipping orders to customer Current cost for 1990 - $1.684M Charges based on a percentage of product cost, not actual utilization New computer system coming online to track individual freight charges
Activity Based Cost Analysis Cost Drivers ActivityCost DriverUnits StorageNumber of Cartons350,000 Requisition HandlingNumber of Requisitions310,000 Basic Warehouse Stock DeliveryNumber of Requisition Lines775,000 Pick PackNumber of Pick and Requisition Lines697,500 Data EntryNumber of Requisition Lines775,000 Desk Top DeliveryNumber of Desktop Deliveries8500 Note: * Number of Requisition Lines = Number of Requisition x Requisition Average (2.5 lines) * Pick Pack Units = 90% x Number of Requisition Lines
Activity Based Cost Analysis Allocation ActivityTotal Cost Total Cost Driver Units Overhead Allocation Storage$1,550,000350,000$4.43 Requisition Handling$1,801,000310,000$5.81 Basic Warehouse Stock Delivery$761,000775,000$0.98 Pick Pack$734,000697,500$1.05 Data Entry$612,000775,000$0.79 Desk Top Delivery$250,0008500$29.41 Total$5,708,000 Note: * Overhead Allocation = Total Cost / Total Cost Driver Units
Question 2: 2) Using your new costing system, calculate distribution service costs for “Customer A” and “Customer B.”
Activity Based Cost Analysis ActivityCost DriverCustomer ACustomer B StorageNumber of Cartons 350700 Requisition HandlingNumber of Requisitions 364790 Basic Warehouse Stock DeliveryNumber of Requisition Lines 9102500 Pick PackNumber of Pick and Req. Lines 9102500 Data EntryNumber of Requisition Lines 9102500 Desk Top DeliveryNumber of Desktop Deliveries 026
Activity Based Cost Analysis ActivityCurrent 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
Activity Based Cost Analysis ActivityCurrentCustomer ACustomer 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($186) Return on Sales (%)16.7%23.8%-0.23%
Question 3: 3) What inference do you draw about the profitability of these two customers?
Return on sales to customer A equals 18,888$ = 23,8 % Customer B equals - 186$ = -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
Question 4: 4) Should TFC implement the SBP pricing system?
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
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?
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