...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...
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...To: Mr. John Malone From: Mr. John Doe CC: Ms. Melissa Dunhill Mr. Tim Cunningham Re: Dakota Office Products Dakota Office Products (DOP) is concerned with the most recent financial statement results after realizing an apparent yearly loss. This is the first loss in the company’s history, which is alarming to management and operations. The income statement, provided in Appendix I, indicates that DOP suffered a net profit before taxes of -1.3% in the year 2000. This memo is in direct regards to the inadequacies of the existing cost allocation system and investigation of using an Activity Based Costing (ABC) method. Dakota Office Products utilizes a traditional cost allocation system. Direct and indirect costs associated with operations are allocated to sold goods. DOP offers a comprehensive product line in office supplies. Traditional cost systems used in such product diversity can cause cost distortions (Martin). Costs were allocated using the activity based costing method to determine where these distortions originate. Six activities were detailed and the ABC driver rate was calculated using the actual cost from the income statement and employee determined capacities (Appendix I). DOP has recently implemented a new convenience to customers with “desktop deliveries”. Warehouse personnel and a small fleet of trucks were assigned to complete the deliveries for the customer at only a 2% premium. When calculating the ABC cost rates, it was immediately evident that the...
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...Case Study: Dakota Office Products 1) Identify expenses on the income statement that are sales fulfillment expenses and divide them into cost pools. * Warehouse Expenses: includes personal and non-personal expenses related processing cost within the facility * Desktop Truck Expenses: includes personnel and delivery truck expenses related to performing desktop delivery functions. * Commercial Delivery Expenses: includes freight cost * Order Entry Expenses: includes manual order setups, order entries by line item, and EDI/Internet order validation functions 2) Find the rate for each cost pool. Cost Pool | Total Cost | Allocation % | Allocation $ | Activity Units | Cost Rate $ | | | | | | | Warehouse Pool | | | | | | Personnel (*) | $2,400,000 | 90% | $2,160,000 | 80,000 | $27 | Non-Personnel | $2,000,000 | 100% | $2,000,000 | 80,000 | $25 | Total Warehouse Pool | $4,400,000 | | $4,160,000 | | $52 | | | | | | | Desktop Delivery Pool | | | | | | Personnel Expenses | $2,400,000 | 10% | $240,000 | 2,000 | $120 | Delivery Truck Expense | $200,000 | 100% | $200,000 | 2,000 | $100 | Total Desktop Delivery Pool | $2,600,000 | | $440,000 | | $220 | | | | | | | Commercial Freight Pool | $450,000 | 100% | $450,000 | 75,000 | $6 | | | | | | | Order Entry Pool (**) | | | | | | (1) Manual Order Setup | $800,000 | 20% | $160,000 | 16,000 | $10 | (2) Order Line Entry | |...
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...Dakota Office Products Case 1. Why was Dakota’s existing pricing system inadequate for its current operating environment? Some problems with the current operating environment include: * Profits only when clients placed large orders for cartons * Real drop of profit when many clients place small orders * Wrong cost determination for individual customers * Wrong cost determination for new services provided by DOP Dakota Office Product uses traditional costing system where direct and indirect costs are assigned and allocated to products and services delivered to customers. This is better for companies where production operations are high labor intensive and overhead costs are smaller part of total costs. Activity Based Costing is going to be better for Dakota Office Products. They will be able to calculate the cost of products and services in accordance to the activities involved and resources consumed. 2. Develop an activity-based cost system for Dakota Office Products (DOP) based on Year 2000 data. Calculate the activity cost-driver rate for each DOP activity in 2000. Activity cost-driver rates: Activity One: process cartons in and out of the facility Rate=(90% of Warehouse Personnel Expense + Cost of Items Purchased)/cartons processed Rate=(90%*2,400,000+35,000,000)/80,000= $464.5 /per carton Activity Two: the new desktop delivery service Rate=(10% of Warehouse Personnel Expense + Delivery Truck Expenses)/desktop deliveries Rate=(10%*2...
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...i. Why was Dakota’s existing pricing system inadequate for its current operating environment? (Hint: Consider why ABC might be a good idea) It is evident in the Dakota Office Products case that there is a wide variety of product created by Dakota that is shipped to their customers. That, paired with the fact that there are high overhead costs related to the desktop delivery option, also tells the reader that an incorrect accounting system is currently being used. One needs only to look at the profitability difference between Customer A & B. Currently, there is no difference in the way that the size of orders are priced. In their current system, only the larger orders create a profit for the customer. ii. Develop an activity-based cost system for Dakota Office Products (DOP) based on Year 2000 data. Calculate the activity cost-driver rate for each DOP activity in 2000. The four activity cost-driver rates can be calculated as follows (show in question ii workings): * Process Cartons in and out of the facility = ((%of warehouse personnel X total warehouse personnel expense) + cost of items purchased) / number of cartons processed. * Desktop Delivery Service = ((% of warehouse personnel X total warehouse personnel expense) + Delivery truck expenses) / number of desktop delivery cartons * Order Handling = (Warehouse expenses + Freight costs) / (Manual Orders + EDI Orders) * Data Entry = Order Entry Expenses / Order Lines iii. Using...
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...Nedim Halilagic Prof. Ermin Cero ACCT 306 December 10, 2013 Dakota Office Products Dakota Office Products (DOP) is a regional office supply company with a strong reputation for customer service and quality supplies. Additionally, DOP is unafraid to adopt new service operations such as its “desk top” delivery option which delivered smaller orders directly to individual sites as we all as its traditional commercially delivered mass orders to customer distribution sites (Kaplan, 2003, pp.1-2). Additionally DOP deployed an Electronic Data Interchange (EDI) solution in order to ease data and payment transfer from and to customers as well as building a customer website that acts an order and account interface for its customers. Together these initiatives all expanded DOP’s customer service and quality metrics but also came with a cost which the company had difficulty identifying. While exact costs were difficult to ascertain for DOP it is clear that the company is incurring expenses in a manner that it previously had not since its EBIT (earnings before interest & taxes) for fiscal year 2000 revealed a -1.3% loss (Kaplan, 2003, p.4). Since the company did not actually break down costs in order to arrive at a more accurate pricing schedule but instead relied only on a universal 15% markup over basic material costs, DOP had absolutely no way of being able to identify where the cost inefficiencies were in its operations. Its existing costing system was inadequate because it...
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...Facts2-3 Issues4 Analysis5-6 Conclusions/Recommendations7-8 EXECUTIVE SUMMARY This case is about how a company should allocate costs. Mr. Delaney is the owner of an automobile dealership that is profitable but not profitable in the area of the body shop department.. The predicament that he faces is that he needs to figure out how to allocate the costs among his different profit centers. One of the things that Mr. Delaney did in trying to assist himself was to hire a consultant. The consultant was one that is very competent in analyzing the issues of cost, both fixed, variable and semivariable. He then tried to relate his knowledge to help Mr. Delaney in his dilemma. Mr. Delaney decided that he wants to provide a high quality product to his customers. He wanted the consultant to further assist him in his analysis by finding out more about his competitors and the prices they charged. The consultant made suggestions that included leasing the body shop to another party, liquidating it, and increasing prices but Mr. Delaney decided that profit is not his main focus at this time. REVIEW OF FACTS This case is about an auto dealership owned by Frank Delaney. This auto dealership included all the operations and "profit centers" of a normal GM dealership. They sold new and used cars, had a parts and service department, and was also involved in rental and leased vehicles. Mr. Delaney hired a consultant who would help him analyze all his different costs associated with...
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...1. Why was Dakota's pricing system inadequate for its current operating environment? Currently, DOP's pricing system is pricing products by adding markup twice, which is marking up the purchased product cost by around 15% to cover the cost of warehousing, distribution, and freight. Then add another markup to cover the approximate cost, for general and selling expenses, plus an allowance for profit. We found that the existing pricing system is inadequate regarding to following points: The current pricing system use cost-plus method, it determines the mark-ups at the start of each year, based on actual expenses in prior years, the general industry condition and competitive trends. Costs continue to rise for customers at normal circumstances which may due to various external reasons like inflations, economic situations etc. The current costing system could not cope with the highly competitive market, and the inflation will make the costs keep increasing to a level that the selling price might not able to cover it. It is because the selling price in based on actual expenses in previous years, while the expenses would still go up with the general inflation. They only charge a small price premium (up to additional 2% markup) to the new desk top delivery. The new service did attract new customers but the inadequate mark-up of 2% for desktop delivery could not cover the costs of providing the service. If clients utilizing desktop delivery place smaller orders it has a negative...
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...Betty W. Steadman 135 IMPLEMENTING THE ACTIVITY BASE COSTING SYSTEM: A CASE STUDY ON DAKOTA OFFICE SUPPLY By Betty W. Steadman Overview Activity Based Costing (ABC) is an accounting method that allows an organization to determine actual costs associated with each product and/or service produced by the organization without regard to the organizational structure or other extraneous function. For Dakota Office Products (DOP), its existing costing system was inadequate because it is incapable of accounting for even all of the known costs such as the desktop delivery service as well as hidden costs such as the 10% DOP paid to maintain its working capital line of credit for accounts receivable (Kaplan, 2003, p.4). Since ABC is a powerful tool for measuring performance, identifying, describing, and assigning costs to, and reporting on an organization’s operations it could solve much of DOP’s critical cost oversights (Caplan, Melumad & Ziv, 2005). Used holistically ABC can be utilized to also improve processes and identify opportunities to improve business effectiveness and efficiency by determining the true or real costs of a given product or service. ABC principles are used to focus management’s attention on the total cost to produce a product or service, and as a basis for full cost recovery of a production or service process. Situational Analysis DOP is a regional office supply company with a strong reputation for customer service and quality supplies. Additionally...
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...Case 4: Dakota Office Products Summary The general manager of Dakota Office Products (DOP), John Malone was concerned about the financial results for the fiscal year 2000. The company had suffered a historic first loss in spite of sales increase from its prior year as noted in the income statement in (Exhibit 1). DOP distributes office supplies and offers a comprehensive product line. DOP had an excellent reputation for customer service and response time. It had operated several distribution centers with storage locations and shipments pending customer orders. DOP normally ships its orders through commercial truckers and had recently attracted new business by offering a “desk top” option by delivering the packages of supplies directly to individual locations at the customer’s site. The company charges a premium price percentage for the service with hopes of improving margins in its highly competitive business. Products are priced to its end-use customers by first marking up the purchased product cost by about 15% to cover the cost of warehousing, distribution, and freight. Then it adds another markup for general and selling expenses as well as for profit. Pricing is adjusted according to relationship and competitive situations. In the year 1999, Dakota has introduced electronic data interchange (EDI) and a new internet site in 2000, which allowed an automated ordering system that did not require a manual input of data. Even after those...
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...Dakota Office Products Case Analysis Concern over a first year loss prompted a case study of the business operations of Dakota Office Products. Harvard Business School professor Robert S. Kaplan authored the case study as an illustration of use of activity based cost allocation and profitability (Kaplan, 2005). In the case presentation, John Malone, the General Manager of Dakota Office Products (DOP) commissioned analysis of the company’s operations and cost allocation practices; it focused on the company’s distribution center. Activities that emerged as cost drivers included: commercial freight shipping, personal delivery of orders under the Desktop Delivery program, warehouse handling and space, and several product ordering and entry activities. In this paper, the cost drivers were utilized to establish activity-based costing for DOP. Profitability for two current DOP customers was also analyzed for behavior patterns that might lead to or suggest improved pricing. Specific assignment questions were detailed and answered on the topic of relative profitability of the two customers. The objective of the analysis was to utilize learnings from the profitability calculations in order to make recommendations which would return DOP to profitable operation following the year of the unexpected loss. If the methods in this paper were utilized, it is felt to be a useful tool to assist DOP management in turning the company around. Method The assignment is summarized in this...
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...intact. Greenlight Accounting is that face-to-face, personal touch and military friendly accounting firm ready to assist with the most miniscule task associated in the process for all Federal, State and local compliances at low affordable and comparable rates. Expanding this one step further is the benefit of green accounting, which is also a service we will be providing, but one that is considered fairly new to the business world, as well as the accounting arena. Table of Contents I. Background and Green Marketing Product Strategy 4 II. Objectives, Pricing, and Goals 5 III. Strategic Plan 5 IV. Marketing Strategy 7 V. Competitive Analysis 9 VI. Customer Analysis 10 VII. Selling Tactics 10 VIII. Evaluation 11 IX. Conclusion 11 References 12 Background and Green Marketing Product Strategy Greenlight Accounting is a start-up organization based in Grand Forks, ND that caters to small firms, self-employment/home businesses and military members. The owners are comprised of three retired military members, all of which have over 20+ years each in management and accounting experience...
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...Case Study Dakota Office Products The Main Learning Outcomes from Analysis of the Case Base on the analysis and investigation of the General Manager’s controller, and directors of operations, , the problem of the organization focuses on its relationship or connection with the employees and the customers. Regarding its relationship with its employee, the problem focuses on the distribution center as well as the desktop delivery of the organization where in it gives difficulties for the employees, because most of the personnel already had more than enough to do. It is important to consider the number of the cartons that are being processed during the year 2000. It can be said that the total number of the tasks is high compare to the current human resource or labor force of the company. In connection to that, the process of entering and validating customer order data also give tedious task. For example, the data entry operators have to enter each line separately. In addition to that, it is important to consider that the data entry operators are processing 16,000 manual orders and then validates 8,000 EDI orders. Where in each manual order has an average of nearly 10 items per order or in total, 15,000 order lines. On the other hand, due to the new EDI system and Internet page, it had made the life of the data entry operator, due to the fact that it set up the orders automatically without much intervention, on the other hand,...
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...peer reviewed journal, or professional conference. This is not a draft, and is submitted for grading to satisfy in part the requirements for this course and the program(s) in which I am enrolled. In typing my name following the word 'Signature', I intend that this certification will have the same authority and authenticity as a document executed with my hand-written signature. Type Signature: Spencer G. Powell TABLE OF CONTENTS Page INTRODUCTION 3 BODY 3 Legalities 3 National Bellas Hess v. Illinois Department of Revenue 4 Quill v. North Dakota 4 Marketplace Fairness Act of 2013 5...
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...drives each of the revenue streams and how much does Tech Mall expect to earn from each stream? 3. Given the level of activity in each revenue stream, compare the amount of revenue expected from each revenue stream with their actual revenue. Is TechMall getting their expected revenue from each of the revenues streams? 4. If actual revenue isn’t what TechMall expected, what might be causing the variation? 5. What can be done to better manage TechMall’s revenue? Great Dakota Bank: Online Banking 1. What are the advantages and disadvantages to Dakota Bank of the new online customers? (answer this questions without numbers) 2. Does it appear that the online customers add to Dakota’s bottom line? Compare the preliminary data to support your conclusion. Support your analysis using numbers given in the case. 3. Is the price of acquiring a new online customer worth the cost? Provide documentation using numbers in the case. 4. Should Dakota keep promoting online banking? Dakota Office Products Note: on page 5 of the case the gross margin for customer B should be $19,000. 1. Identify expenses...
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