DAKOTA OFFICE PRODUCTS

Activity Based Costing (ABC)

Dakota Office Products (DOP)

Dakota Office Products is a regional distributor of office

supplies to institutions and commercial businesses. It has an excellent reputation for customer service and responsiveness. Product line ranges from simple writing implements like pencils and markers to photo-copy papers.

Operation Process
Warehouse: a. Unload truckload shipments of products from manufacturers, and move them into their designated storage locations. b. After receiving customer orders, DOP warehouse personnel accumulate the cartons of items and prepare them for shipment. Customer ordering and validation: a. Set up a manual customer order b. Enter individual order lines in an order c. Validate an EDI/internet order

Orders Delivery

Commercial Trucks.

Dakota Trucks deliver

desktop packages directly to the customer.

Pricing Structure
Marking up the purchased product cost by 15% to cover

the cost of warehousing, distribution, and freight. Add another markup to cover the approximate cost for general and selling expenses, plus an allowance for profit. The markups were determined at the start of each year, based on actual expenses in prior years and general industry and competitive trends. Actual prices to customers were adjusted based on longterm relationships and competitive situations, but were generally independent of the specific level of service provided to that customer, except for desk top deliveries.

Current Situation
Increase In Sales Increase In Costs Loss in profit for the 1st Time

in the DOPs history.

Despite introducing innovations such as desktop delivery and electronic order entry, the DOP could not earn a profit.

Activity-Based Costing Steps

Cost Object : Orders Primary Activities 1. Process cartons in and out of the facility 2. New desk top delivery service 3. Order handling 4. Data entry. Consumption of Resources Cost

Activity Cost Pools & Measures

Activity Cost Pool Ship Cartons Process Cartons Desktop Delivery Process Manual Custom Order Enter Items Ordered (Manual) Process EDI Order Activity Measure Number of cartons shipped commercial freight Number of cartons ordered Number of desktop deliveries Number of orders, manual Number of line items, manual Number of EDI orders

Activity Cost Pools Percentages & Amounts

Activity Cost Pools - Percentages
Ship Cartons Process Cartons Desktop Delivery Process Manual Enter Items Ordered Process EDI Order Customer Order (Manual)

Totals 100% 100% 100% 100% 100%

Freight Warehouse Rent & Depreciation Warehouse Distribution Personnel Delivery Truck Expenses Order Entry Expenses

100% 0% 0% 0% 0%

0% 100% 90% 0% 0%

0% 0% 10% 100% 0%

0% 0% 0% 0% 20%

0% 0% 0% 0% 75%

0% 0% 0% 0% 5%

Activity Cost Pools - Amounts

Ship Cartons Process Cartons Desktop Delivery Process Manual Enter Items Ordered Process EDI Order Customer Order (Manual)

Totals $450,000 $2,000,000 $2,400,000 $200,000 $800,000 5,850,000

Freight Warehouse Rent & Depreciation Warehouse Distribution Personnel Delivery Truck Expenses Order Entry Expenses Totals

450,000 450,000

2,000,000 2,160,000 4,160,000

240,000 200,000 440,000

160,000 160,000

600,000 600,000

40,000 40,000

Activity Based Costing Model

Customer Profitability
Customer Margin - Activity Based Costing Rate/$ Customer A Customer B Number of Activity Debit\Credit Number of Activity Debit\Credit 103,000 (85,000) 104,000 (85,000) Item Sales Cost of Items Purchased Operating Costs: Processing/Carton Freight/Carton Delivery to Desktop/Delivery Process.CustomOrd/ManualOrd EnteringItemsManual/line Process EDI Order/EDI order Interest on Accounts Receivables Customer Margin Profitability percentage(Customer Margin\Sales) 52 6 220 10 4 5 0 200 200 6 60 6 9,000 (10,400) (1,200) (60) (240) (30) (900) 5,170 5.02% 200 150 25 100 180 30,000 (10,400) (900) (5,500) (1,000) (720) (3,000) (2,520) -2.42%

Differences In Profitability between Customer A & Customer B

1. The cost of desktop delivery. 2. The processing of manual orders. 3. The cost of entering items manually. 4. The interest on accounts receivable.

Recommendations
Difference 1: The cost of delivery to the desktop (Applying the fixed cost of the delivery truck expenses on the Desktop delivery on the customers who have used it will lower the profitability of these customers) Recommendation: Using only the shipping by commercial trucks Make use of Dakotas truck fleet in another activities as to lower the delivery truck expenses portion applied on theses customers

Recommendations
Difference 2 & 3: The processing of manual orders & the cost of entering items manually. Recommendation: Increase the pricing on Customer B to cover the loss incurred from this activity. Encourage customer B on using the EDI and the Internet for placing their sales orders by offering them a competitive pricing when using these two tools. To encourage Customer B on placing bulk orders rather than small orders, this will save the time of processing manual orders.

Recommendations
Difference 4: The interest on accounts receivable - Customer B is consuming much more from Customer A by applying the 10% interest Rate. This lost amount is a cost that needs to be figured out on how to lower it as it is lowering the cash flow and it disables the company capability in using it in other opportunities. Recommendation: To have an agreement with customer B on the payments due date by encouraging them with a price discount.

Conclusion
From applying the activity based costing the company

could find the activities lowering the profit. It gives a base for further decision making to:
Enhance the operations, Remove the unneeded activities, Increase the profit.

It gives a realistic costs on the designated cost objects

(Order) in our case