The Case Presentation of Managerial Accounting

Members of Group #6

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Candace - M9770233

May - M977Z262

Outline

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

The Case Study of

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)

BackgroundThe Value Chain Concept – TFC

Trees Pulp PaperFormsMfg.

FormsSales TFC

CustomerPurchasingManager

CustomerReceiving

FormsUser

Storage &InventoryFinancing

RequisitioningStock

Selection &Pick Pack

OrderEntry &Billing

Desk TopDelivery

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

Exhibit 1

Exhibit 3: TFC Net Sales, 1991

3.6%

48.0%

4.8%

19.0%

7.8%

15.0%13.0% 11.0%

70.7%

7.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

>$300,000 >$150,000 >$75,000 >$30,000 >$0

% of Accounts % of TFC Net Sales

Exhibit 4

Exhibit 5

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

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%) $ 761,000 13.3%

"Pick-Pack" Activity (42%) $ 734,000 12.9%

Desk Top Delivery (14%) $ 250,000 4.4%

Data Processing Expense         $ 612,000 10.7%

Total $ 5,708,000 100.0%

Activity Based Cost AnalysisCost Drivers

Activity Cost Driver 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 Number of Requisition Lines 775,000

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

Activity Based Cost AnalysisAllocation

Activity Total CostTotal Cost

Driver UnitsOverhead 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 $612,000 775,000 $0.79

Desk Top Delivery $250,000 8500 $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

Activity 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 910 2500

Data Entry Number of Requisition Lines 910 2500

Desk Top Delivery Number of Desktop Deliveries 0 26

Activity Based Cost Analysis

Activity CurrentActivity Based

Customer A

Activity Based

Customer BStorage $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

Activity Current Customer A Customer B

Sales $79,320 $79,320 $79,320

Product Cost $50,000 $50,000 $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

Thank You

For Your Attention