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Dakota Office Product

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MEMORANDUM

DATE: February 10, 2015
TO: John Malone, General Manager Dakota Office Products
FROM:
-------------------------------------------------
RE: Analysis of Dakota Office Product Cost Accounting System and Recommendations

As requested, we have evaluated the accounting practices of Dakota Office Products (DOP), and have reviewed the current cost accounting system along with customer examples. Based on our evaluation, we have reached the following conclusions:

1. The current cost accounting system is not accurately allocating costs 2. Desktop delivery pricing should be increased and EDI orders should be encouraged

The remainder of the memo explains the basis of our conclusions. The analysis is structured into three parts: 1) Current System 2) Costs and Profitability 3) Management Recommendations

Current System
Dakota Office Product’s current cost accounting system is inadequate since it does not allocate expenses properly based on services rendered. The system does not take into account the differences between transactions and the applicable costs associated with each transaction. Moreover, a flat markup of 15% does not sufficiently cover the company’s expenses, and has incorrectly led management to believe they were making a profit. Thus, the current system is flawed since DOP is losing money even though they had an increase in sales year over year.

Costs and Profitability
We reviewed the two (2) customer examples and provided an activity based cost (ABC) accounting system along with a profitability comparison in the attached Exhibits 1-3. As noted, desktop deliveries are the main cost differentiator between the two companies. Customer B incurred $5,500 in cost associated with 25 desktop delivers where Customer A did not utilize desktop deliveries at all. Furthermore, allocating costs using an ABC system has...

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