Midwest Office Products

In using the ABC system, Valves and Pumps are matching the company’s target of 35% of gross margin apart from Flow Controllers. With the use of TAC, the gross margin on pump sales is 19.5% that well below the company's target gross margin of 35%. This indicates that the current overhead cost allocation practice did not reflect the real costs incurred on the products. The lower actual gross profit obtained was mainly due to wrong cost allocation on the pump product.

Develop and diagram an activity based cost model using the information in the case. Provide your best estimates about the cost and profitability of Wilkerson’s three product lines. What difference does your cost assignment have on reported product costs and profitability? What causes any shifts in cost and profitability?

Second, the manufacturing order costs for non-stocked items was calculated by dividing total manufacturing order costs for non-stocked items by the number of orders for non-stocked products. Non-stocked products have additional costs associated with processing orders that went above and beyond the costs associated with a stocked product. The third step involved determining what the S"A allocation factor would be for calculating the S"A volume related costs. This allocation factor would then be applied to manufacturing COGS. The fourth and final step involved the calculation of the operating profit based on backing out volume related costs from sales revenues followed by deducting S"A and manufacturing order costs from the resulting gross margin to arrive at a operating profit.

In our second assumption, instead of using the cost of goods per cases in 1986, we try to use the percentage it counts in the total expenses which is 50.4% and to find the sales needed to break-even. The detail of the calculation is shown in the answer for questions d. The result is that 95,635, a little bit higher than the estimated sales of 90,000.

Under an ABC system, the allocation of costs to products is achieved through at least four analytical steps. Firstly, costs are grouped into activity levels. Secondly, cost drivers are

One of the best aspects of the way the time-driven ABC system was put into place at Kemps was how efficiently and accurately management determined the main issues with the current cost system and responded with appropriate and relevant solutions. For example, one of the greatest problems the company was facing was that many of its operating costs were spread out equally over a customer base that was growing more diverse and demanding more personalized and varied service, effectively cutting or potentially eliminating entirely Kemps’ profit margins for a product. Therefore,

8. Using the ABC data, compute the average contribution to profit per account for both retail and business customers. What business strategy would be a manager using the ABC cost system likely adopt? How does this result compare to your response to Requirement 1, Part E?

Next you learn that packaging differs for each channel. You discover that retail accounts for 80%

The strategy for Costco was that the company continued to buy merchandise at volume discounts from manufacturers, rather than distributors. The stock is usually shipped directly to selling warehouses to minimize freight costs. Stocked items are placed directly onto the selling floor or are still stacked on their pallets, reducing handling and stocking labor. The number of sales and service employees is also minimal, with a large percentage of the employees holding part-time status. Warehouses are almost entirely self-service, from finding and buying items, to loading them into a customer's vehicle. (Miller, 2011)

Abby Conroy was tasked with calculating an effective quote for Breeland Ltd., she chose the activity based accounting costing system since it more accurately captures the related costs. A special order was placed by Breeland Ltd. with Ace Fertilizer Company. The did not plan to order more of this product in the future. Based on Ace’s policy, the special order included disposal costs for any used materials in the event no other orders existed for the unused materials at the time the Breeland contract was signed. Abby correctly calculated the total direct material and labor costs and accurately arrived at the indirect costs using the ABC method and used cost activity pools that make sense for the company and

The cost in transportation rates will increase for MARS Inc. with this change. The Portland supplier’s location to MARS Inc. based on the current situation charges “per hundredweight is $10 for carload lots of 50,000 pounds. The less than carload rate is $15 per hundredweight.” While anything coming from the Columbus supplier was offered just-in-time delivery service at no charge to MARS Inc. Also, this will affect the EOQ’s because dealing with the Columbus supplier they were located close enough that they offered JIT delivery which allowed the reduction minimizing “work-in-process inventories (waste) by reducing lot sizes in order to increase production efficiency and product quality.” Now, with the change, it will force MARS Inc. to spend money on warehousing and carrying cost due to the one week replenishment cycle the Portland supplier has.

 QUESTION 3Explain the interests and disadvantages of the non-integration of ABC in the Cost Accounting Information System.

Under the original costing system used by Dakota Office Products, Customer A is shown to be slightly less profitable than Customer B. From the calculations above, we see that Customer A is slightly profitable at 0.3% profit as a percent of sales, and Customer B is not profitable, at a loss of (7.1%). We observe that Customer A is a consumer of low-cost services and generally pay their bills within 30 days unlike customer B who took 90 days or more. Timely servicing of debt led to profitability of Customer A.

The ABC system will help management analyse the profitability of each customer and restore the profitability of the company. Allied needs to offer benefits such as modified compensation plan focused on growing customer revenue and profitability to help encourage sales behaviour. TFC is able to significantly improve profits by concentrating on individual account management which SBP is capable of by identifying service costs and calculate the contribution for each account and then rank the accounts according to profitable ones. TFC should charge its customers based on their service usage by using cost plus pricing. The customers would be charged based on the cost of product plus service charge based on SBP systems plus a mark-up so that it will be fair to customers that have the same sales but different level of service.

▪ Cherita Howard should conduct a financial analysis if the booking request of WICB will be profitable. She needs to calculate the revenues received from the WICB booking, the direct costs associated with that