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 - M977Z227Tomi –M977Z206Drazen –MCandace - MFah - M977Z223Natko –M977Z205Cindy - M
3 Outline There are 3 cases which are: Allied Office Products Chalid WinesData Services Inc.
4 Allied office products The Case Study ofAllied office products
5 BackgroundIn 1992, Allied Office Products was a corporation with annual sales of $900 millionSince 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 manufacturingBusiness formsSpecialty 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)WarehousingInventory financingForms usage reportingInventory controlDistribution (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 networkTFC inventory storage10 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 expenseSales marginSales force charges average of 20% of product and servicesIndividual 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 ChainTreesPulpPaperForms Mfg.Forms SalesTFCCustomer Purchasing ManagerCustomer ReceivingForms UserThe TFC ChainStorage & Inventory FinancingRequisitioningStock Selection & Pick PackOrder Entry & BillingDesk Top DeliveryFreight
9 Distribution Center Activity Analysis Identified and reviewed six primary activities across five distribution centersInterviews with key staffSite ManagerWarehouse SupervisorData Entry OperatorConducted activity cost analysisIdentify 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 FacilityStorage and inventory management of business form cartonsCurrent cost - $1.55MInventory obsolescenceExcess inventoryCurrent inventory – 350,000 cartonsCost of capital – 13%Customer does not pay for inventory until requisition submission
11 Requisitioning Activity Analysis Processing of orders according to customer requestCurrent cost - $1.801M310,000 requisitions per yearEach 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 SupervisorProcess of selecting cartons and partial cartons to meet customer ordersCurrent combined cost - $1.495MStock selection - $0.761MPick pack - $0.734M90% 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 OperatorEntry of customer order information into computer systemCurrent cost - $0.612MLabor intensive with all manual entryRequisitions submitted line by line
14 Desk Top Delivery Activity Analysis Specialized delivery of orders to specific areas of customer’s locationCurrent cost - $0.250MPremium service with no additional feesAverage time to complete – 1.5 to 2 hours8500 requests completed per year
15 Freight Activity Analysis Cost of shipping orders to customerCurrent cost for $1.684MCharges based on a percentage of product cost, not actual utilizationNew computer system coming online to track individual freight charges
23 Activity Based Cost Analysis Cost Drivers UnitsStorageNumber of Cartons350,000Requisition HandlingNumber of Requisitions310,000Basic Warehouse Stock DeliveryNumber of Requisition Lines775,000Pick PackNumber of Pick and Requisition Lines697,500Data EntryDesk Top DeliveryNumber of Desktop Deliveries8500Note:* 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 CostTotal Cost Driver UnitsOverhead AllocationStorage$1,550,000350,000$4.43Requisition Handling$1,801,000310,000$5.81Basic Warehouse Stock Delivery$761,000775,000$0.98Pick Pack$734,000697,500$1.05Data Entry$612,000$0.79Desk Top Delivery$250,0008500$29.41Total$5,708,000Note:* 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 DriverCustomer ACustomer BStorageNumber of Cartons350700Requisition HandlingNumber of Requisitions364790Basic Warehouse Stock DeliveryNumber of Requisition Lines9102500Pick PackNumber of Pick and Req. LinesData EntryDesk Top DeliveryNumber of Desktop Deliveries26
27 Activity Based Cost Analysis CurrentActivity Based Customer AActivity Based Customer BStorage$1,550.50$3,101.00Requisition Handling$2,114.84$4,589.90Basic Warehouse Stock Delivery$891.80$2,450.00Pick Pack$955.50$2,625.00Data Entry$718.90$1,975.00Desk Top Delivery$0.00$764.66Subtotal ABC$10,250$6,231.54$15,505.56Freight$3,500$2,250$7,500Cost of Capital$2,350$1,950$6,500Total$16,100$10,432$29,506Note: * Activity Based Customer = Customer Cost x Overhead AllocationCost of Capital = 13% x Customer’s Average monthly inventory balanceCurrent Subtotal ABC = 20.5% x Product CostCurrent Freight = 7% x Product Cost Current Cost of Capital = 4.7% x Product Cost
28 Activity Based Cost Analysis CurrentCustomer ACustomer BSales$79,320Product Cost$50,000Distribution/Services (32.2%)$16,100----ABC$10,432$29,506Return on Sales ($)$13,220$18,888($186)Return on Sales (%)16.7%23.8%-0.23%
29 Question 3:3) What inference do you draw about the profitability of these two customers?
30 Return on sales tocustomer A equals 18,888$ = 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 lossThis couldn’t been seen through the current accounting systemWhen 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 purchaseCustomers will be more satisfied with the serviceThe 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 OptimizationCentralize data entry into single locationBuild a staffing model designed to reduce headcount, possibly by consolidating warehousesModify compensation plan to help encourage sales behavior focused on growing customer revenue and profitabilityImplement Customer Profiling ProgramInitiate 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 processIntroduce customer needs assessment and cross-sell initiativeReduce pick-pack orders: work with Allied to reconfigure cartons to meet top 40 accounts’ buying patterns