Allied office Products

...

Activity Based Costing

ACTIVITY

CURRENT

CUSTOMER A

CUSTOMER B

Storage

$ 1,550.00

$ 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

$ 764.00

Subtotal ABC

$ 10,250.00

$ 6,231.54

$ 15,505.56

Freight

$ 3,500.00

$ 2,250.00

$ 7,500.00

Cost of capital

$ 2,350.00

$ 1,950.00

$ 6,500.00

Total

$ 16,100.00

$ 10,432.00

$ 29,506.00

→ Current freight = 7% x product cost → Cost of capital =

→ Current cost of capital = 4.7% x product cost 13% x customer’s monthly inventory balance

→ Current subtotal ABC = 20.5% x product cost

Activity

Current

Customer A

Customer B

Sales

$ 79,320

$ 79,320

$ 79,320

Product cost

$ 50,000

$ 50,000

$ 50,000

Distribution service (32.2% * 50000)

$ 16,100

-

-

ABC (from the previous table)

-

$ 10,432

$ 29,506

Return on sales (Sales – product cost – distribution cost)

$ 13,220

$ 18,888

- $ 186

After calculatng the ABC system for services costs and distribution services, the last computation results different sales from customer A and customer B. Before ABC system is implemented, with all costs incurred, the return on sales was $ 13,220 which does not necessarily explain whether it is profitable or not. By implementing ABC, it turns out that working with customer A would be more profitable for the company since the return on sales is $ 18,888 or about 24%, rather than working with customer B since it gives loss of $186 or about 0,23% loss to the company. This could not be seen through current accounting system. Therefore, the implementation of ABC is necessary in order to give seperate costs for each customer. Moreover, service based pricing or SBC system should also be implemented because every customer will be charged for what they purchase, thus giving a fair price for the customer. It will also be easier for the company since they will know the exactly costs incurred for each customer. In return, SBP system would increase customer satisfaction as and easier for the company to allocate resources. Overall, the TFC business have implemented a good system but perhaps it would be better if the company centralize data entry into the same location or just one location to ease the operation control and reduce any misleading information (eg. Multiple orders). The company may also change the compensation plan to motivate the sales behavior. By encouraging the sales, employees would focus on increasing the revenue and customer profitability. Since inventory is usually rest in the warehouse for several days and the company needs to bear the cost, Allied may start to implement Just in Time (JIT) inventory system, so they will stock the inventory when ordered. The trained workers pick the exact number of forms requested by the clients which requires the labors to give out more efforts. Reducing such pick-pack orders would be necessary and establishing an autofill order process to reduce time taken.