DAKOTA OFFICE PRODUCTS

Group 6

Aashita
Abhinav
Aditi
Amina
Athira
About the Company
Regional distributor of office supplies

Shipping through commercial truckers

Recent addition desk-top delivery option

Introduction of EDI in 1999 and an internet site
for online orders in 2000 increased
convenience for customers


John Malone
(GM)
Melissa Dunhill
(Controller)
Tim
Cunningham
(Director of
Operations)
Key Personnel
Key Facts
The company followed a traditional way of
costing
Two major functions/departments: distribution
(warehouse) and data entry
Despite increase in sales, the company had
suffered a loss for the first time in 2000
The system of accounting for various costs was inefficient. The
company needed to review its day-to-day operations to identify
possible cost centres for which costs could be measured. The costs can
then be accordingly allocated to the manual orders and desk-top
orders depending on the respective quantum of orders
Activities Identified
Distribution Facility Data Entry Operations
Processing of cartons in and
out of the warehouse
Desk-top delivery Service
Order Handling
Setting up a manual customer
order
Entering individual order lines
in an order
Validating an EDI/internet
order
Processing of cartons in and
out of the warehouse
Desk-top delivery Service
Order Handling

Setting up a manual customer
order
Entering individual order lines
in an order
Validating an EDI/internet
order
Key Activities and Cost Drivers
Activity Cost Driver
Carton Handling at the distribution facility Number of Cartons
Carton Shipping by Commercial Trucks Number of Cartons
Carton Delivering under Desk-top Option (Delivery
Truck and Personnel Expense)
Number of Deliveries
Order Entry: setting up a manual order Number of Manual Orders
Order Entry: entering individual order lines in an
order
Number of order lines
Order Entry: validating an EDI/ Internet Order Number of EDI orders
Activity
Cost
Pool (in
$)
Cost
Driver
Cost
Driver
Quantity
(in units)
Pool
Rate
(in $)
Product
Line
Cost Driver
Quantity for
Product Line
Activity Cost for
Product Line (in
$)
Carton Handling at
the distribution
facility
4160000
Number
of
Cartons
80000 52
Manual 75000 3900000
Desk-top 5000 260000
Total 80000 4160000
Carton Shipping by
Commercial Trucks
450000
Number
of
Cartons
75000 6
Manual 75000 450000
Desk-top 0 0
Total 75000 450000
Carton Delivering
under Desk-top
Option (Delivery
Truck and Personnel
Expense)
440000
Number
of
Deliveries
2000 220
Manual 0 0
Desk-top 2000 440000
Total 2000 440000
Activity Based Costs
Activity
Cost Pool (in
$)
Cost Driver
Cost Driver
Quantity (in
units)
Pool Rate
(in $ per
unit of
cost
driver)
Order Entry: setting up a manual
order
160000
Number of
Manual Orders
16000 10

Order Entry: entering individual
order lines in an order
600000
Number of
order lines
150000 4

Order Entry: validating an EDI/
Internet Order
40000
Number of EDI
orders
8000 5

General and selling expenses 2000000
as a %age of
sales
42500000 0.047
Customer Profitability
Under ABC Method
CUSTOMER A CUSTOMER B
Amount (in
$)
relative
%age
Amount (in
$)
relative
%age
Sales 103000 121.2% 104000 122.4%
Less: Cost of Items Purchased 85000 100.0% 85000 100.0%
Gross Margin 18000 21.2% 19000 22.4%
Less: Total Overhead Costs 16846 19.8% 24158 28.4%
Operating Income 1154 1.4% -5158 -6.1%
Under Traditional Method
CUSTOMER A CUSTOMER B
Amount (in
$)
relative
%age
Amount (in
$)
relative
%age
Sales 103000 121.2% 104000 122.4%
Less: Cost of Items Purchased 85000 100.0% 85000 100.0%
Gross Margin 18000 21.2% 19000 22.4%
Less: Warehousing, Distribution and Order Entry 12750 15.0% 12750 15.0%
Contribution to general and selling expenses and profit 5250 6.2% 6250 7.4%
Less: General and selling expenses and interest charges 4916 5.8% 5638 6.6%
Operating Income 334 0.4% 612 0.7%
Conclusion
The traditional volume based system of costing
does not account for the costs appropriately.
Therefore the company should adopt the activity
based costing system for accounting.
This would help in identifying the costs of
various activities, customers, the type of order
placing and the type of delivery option.
Thus, the company can review and revise its
pricing policy.