Office Dakota Products Case Analysis

speckle Dakota Products Case compend work BUSA 5061 Managerial Accounting Students Name Teresa Willette Professors Name Dr. Conner/Dr. Pollard fancy 3/20/2011 Executive Summary The following analysis is write for Dakota Office Products to evaluate current business operations and recommend future actions necessary to operate lodge success. In the analysis of the caller-out we testament identify inefficient business practices that have led to the companies first kale loss in its history.We will evaluate the caller-ups current pricing structure, lodge methods, shipping and delivery process, and deficiencies in cash flows. For Dakota Office Products (DOP), its existing constitute dust was undermanned because it is incap fitted of report for still all of the know instituteresss such as the setting delivery service as well as hidden woos such as the decennary percent DOP paid to maintain its working capital line of de nonation for accounts receivable. utilise the l egal action found speak toing( first rudiment) methodology can be use to also improve processes and identify opportunities to improve business effectiveness and readiness by determining the true or real termss of a given intersection point or service. ABC principles argon used to rivet steerings attention on the total live to produce a point of intersection or service, and as a creation for full cost retrieval of a wargonion or service process. Background Information The phoner under the select, Dakota Office Products, is an established and reputed player under this segment.They were regional distributors for mathematical function supplies and the major clientele served by the confederation included institutional and commercial-grade clients. It dealt with all kind of office supplies starting from all kinds of writing equipment to paper and other office supplies. The caller-out has been able to carve a good name for itself in the industry. The keep company had a lso arranged for several dissemination centers where the shipments were required to be unloaded and packed into cartons meant to be delivered to the respective customers.In parliamentary procedure to profit the utility for its customers, the company had introduced the desk top option for its cherished customers. Under this option, the company will use its own fleet to today deliver the goods at the customers premises. The company charged a small additive amount of upto 2% of the memorialiseed bell for this additional value added service. This termination was made keeping in mind that such a close could boost the margins of the company. The company had the policy of marking the sales price by 15% over and above the purchase price. This policy was framed o ensure that the viewgraphs and transportation cost of the materials could be made up from the mark up. The company would then add another mark up to ensure coverage of general expenses and contribution of the company. The mark up ending was interpreted at the beginning of the year found on the projected cost of the different products of the company. Key Issues The management is faced with major pricing and cost issue for its products. The company has been using the conventional be method to imagine the cost of the product pop the questiond to the clients.The company then adds a mark up as per its policy to come up at the exchange price of the product. As a result of not following the exertion base Costing, the company has not been able to cost the products realistically. This has kick in to mispricing of the products and resultant boilersuit loss to the company. The fact that an increase in sales has not lead to an increased profits, instead, it has resulted in increased losses has exposed the limitations of the cost business relationship scheme of the company. The company has not been able to increase its profits.This has led the management to believe that the existing cost account mu sical arrangement has some monstrous flaws which ineluctably to be rectified on an immediate basis so as to avoid making bad conclusiveness leading to losses to the company. The company should now be contemplating the execution of Activity based be system so as to ensure proper record booking of development which will lead to optimum decision making for the company as a whole thus contributing to the growth of the company by increased profitability. The key issue presented in front of the management is the manageable steps to be taken by the management in order to avoid such losses.Critical Thought The issue addressed by the bill system of Dakota office products invites our attention to the premise of Activity Based costing methodology. We are certain virtually the fact that the chronicle and reportage system at Dakota Office Product is impertinent and is leading to the company making wrong decision ultimately leading to losses. This was apparent from the record where t he company was able to increase its sales without a corresponding increase in the profits for that particular year.Activity based costing system is an approach which seeks to allocate the overhead cost to the products on a scientific and realistic basis. The existing system of allocating cost at Dakota Office products were inadequate in so much so that it was following an unreasonable basis for allocating the cost, which were known and visible, such as the desktop delivery cost. The existing system was suffering from oversight of some of the expenses. ABC costing system seeks to overmaster the problem of oversight and make a more reasonable allotment of the costs.The distinctive feature of this method is the fact that the method can provide useful insights to the management as to the activities which are leading to the cost by identifying the cost drivers, rates and the build of practise undertaken. This can also protagonist the management redesign the operational system such t hat the costs associated with the products are reduced. We must also note that the handed-down method of costing able by Dakota Office Products are typically designed for companies who are transaction with only a single product, or homogeneous products.However Dakota Office Products have come to a stage that they are dealing in double products such as writing instruments to copier to pages, thus it makes the traditional costing method even more impractical to be followed by the company. This company was dealing in numerous products and was also making strides in adapting varied operational methodologies such as the desktop delivery or the sales through e commerce internet sites. The operations of the company are such that it would be apt for the company to establish a cost driver rates and apply those rates in the products of the company.The cost driver rates could also be used by the company while applying the cost overheads to some other products that the company may be planni ng in the future. The existing system of the company involves use of some activities and the company has been able to regularize the operations of the company and is clear about the operational goals that need to be fulfilled by the company. The company is dealing in an industry where the products are quite heterogeneous in record and once the products are purchased there is very little scope of industriousness of direct materials or labor.The major cost that is expected to be incurred is the overhead costs which are factual dependent upon the number of activities undertaken to accomplish the task. The cost drivers need to be ascertained before the application of the cost drivers to the number of activities attributable to the product as regards the particular activity. Alternate Solution A noteworthy fact is that the company has posted increased losses in spite of an increase in overall sales of the company. The objective of the suffice is to let the management be aware of the reasons as to why the company has osted losses even after an increase in the sales. Moreover, the management needs to be shown the way by which the company could remedial action so that the managements direction is towards the right direction. The alternate solution available to the company could be enlisted as follows Increase in selling price of the products Review the accounting procedures and implement the change required in accounting procedures Discontinue the product which reports a loss We will make a brief study of the above alternatives before forming an opinion on any of the alternatives.As the company is operating in a competitive market, so an increase in selling price of the products is expected to have far reaching repercussions in the sense that the company could go on to lose clients and contracts which could lead to even lower sales and higher losses. Moreover, the existing accounting procedure is inappropriate to produce the actual cost of the product. The computa tion of actual cost of the product is important in the backdrop of the company policy to add a mark up on the cost price of the goods.If the accounting system is inappropriate to calculate the cost of the cost, then it would be inappropriate to add a mark up on the goods based on the cost as produced by the existing accounting procedure. A review of the accounting procedure is duly called for as the existing accounting procedure is not appropriate. The accounting procedure is not apt for a company having multiple products and multiple processes, and very little expenses on the direct materials and labor. Application and implementation of the ABC system will be able to contribute to the accounting procedure adapted by the company.A product which is not able to contribute to the overall profits of the company could be considered to be discontinued. However, the decision of the product to be discontinued lies with the management and the accounting system. As mentioned earlier, the acco unting system is not fit, so the company should first implement an ABC costing system in order to make proper decision regarding the costing and pricing of various products as well as the costing of servicing various clients.Implementation Measures and Follow up Dakota was following the traditional method of allocating overheads across the product lines. The overheads were not allocated to the products based on the activity undertaken for the manufacture of the product. This led to mispricing of the product and also led to difficulty in taking optimum decision for the company as a whole. The company had incurred losses in spite of an increase in sales, because the company was selling a product at a loss (which was not discover by the traditional costing system).We need to identify the activities on which the cost is dependant, in order to calculate the cost driver rate. The following are the activities identified Processing of Cartons (Activity 1) Service Involving Desktop Delivery (Activity 2) Order treatment (Activity 3) Data Processing and Entry (Activity 4) Activity 1 add up of Expenses = storage warehouse Personnel Expense (90%) + Items Purchased = 90%*2400000+35000000 = 2160000 + 35000000 = 37160000. Activity number one wood (Processing of Carton) = 80000 Cost Driver Rate for Activity 1 = 37160000 / 80000 = $ 464. 5 per carton.Activity 2 Amount of Expenses = Warehouse Personnel Expense (10%) + Delivery Truck Expense = 10%*2400000+200000 = 240000 + 200000 = 440000 Activity Driver (Desktop Delivery) = 2000 Cost Driver Rate for Activity 2 = 440000 / 2000 = $ 220 per carton. Activity 3 Amount of Expenses = Warehouse Expense + Freight = 2000000+450000 = 2450000 Activity Driver (Orders) = 16000+8000 = 24000 Cost Driver Rate for Activity 3 = 2450000 / 24000 = $ 102. 083 per order. Activity 4 Amount of Expenses = Order Entry Expenses = 800000 Activity Driver (Orders Line) = 150000 Cost Driver Rate for Activity 4 = 800000 / 150000 = $ 5. 3 per line. The imple mentation involves cipher the profitability of the two clients A Sales Cost Gross permissiveness No of Cartons Ordered 464. 5 92900 9290 0 B 1040 103000 00 8500 85000 0 1900 18000 0 Desktop Deliveries 220 Order Handling 102. 083 1224. 996 Data Entry 5. 33 make out Cost 319. 8 94444. 8 959. 4 1095 67. 7 5567. 7 1020 8. 3 0 5500 Contribution 8555. 204 The following are the main causes of difference in profitability between the two customers Customer B has a desktop deliver of 25 whereas customer A has none. The number of data initiation for customer B is 180 whereas it is about 60 for customer A.References Michael H. Granof, David E. Plat, Igor Vaysman. (2000). Using Activity-Based Costing to Manage More Effectively. http//costkiller. net/tribune/Tribu-PDF/Using-Activity-BasedCosting-to-Manage-More-Effectively. pdf Rockford Consulting, retrieved March 21, 2011, from http//rockfordconsulting. com/activitybased-costing%20(ABC). htm Value based management, retrievd March 21, 2011, fr om http//www. valuebasedmanagement. net/methods_abc. html Dakota Products Case Office Analysis Course BUSA 5061 Managerial Accounting Students Name Teresa Willette Professors Name Dr. Conner/Dr. Pollard Date 3/20/2011