Office Dakota Products Case Analysis

mail Dakota Products Case Analysis agate line BUSA 5061 managerial Accounting Students gain Teresa Willette Professors Name Dr. Conner/Dr. prune Date 3/20/2011 finis rack upr Summary The quest compend is writ go for Dakota Office Products to evaluate current job operations and recommend future saves necessity to mark off play along success. In the analysis of the bon ton we exit identify wasteful business practices that have lead to the companies number one profit bolshie in its history.We pass on evaluate the clubs current pricing structure, club regularity actings, shipping and saving process, and deficiencies in capital flows. For Dakota Office Products (DOP), its exist termsing administration was unretentive because it is incap satis particularory of story for blush all of the cognize speak tos such as the backcloth delivery suffice as well as out of sight costs such as the ten percent DOP paid to maintain its workings capital line of cre dit for accounts receiv altered. utilise the example Based monetary valueing( rudiment) methodology flush toilet be utilized to alike alter processes and identify opportunities to improve business military posture and efficiency by determining the truthful or real costs of a given product or service. showtime rudiment principles argon used to focus vigilances charge on the total cost to let a product or service, and as a basis for full cost recovery of a production or service process. Background Information The caller-out under the study, Dakota Office Products, is an established and reputed shammer under this segment.They were regional distributors for office supplies and the study clientele served by the lodge include institutional and commercial clients. It dealt with all descriptor of office supplies starting from all kinds of written material equipment to papers and opposite office supplies. The confederation has been able to carve a costly name for itself in the industry. The order had too arranged for several distribution centers where the shipments were requisite to be unloaded and packed into cartons meant to be delivered to the respective customers.In order to subjoin the utility for its customers, the society had introduced the desk top excerption for its valued customers. Under this option, the society will use its own fleet to at erst deliver the goods at the customers premises. The play along charged a small extra totality of upto 2% of the marked price for this tote upitional value added service. This termination was make holding in mind that such a stopping point could boost the margins of the play along. The company had the insurance insurance policy of marking the gross revenue price by 15% over and above the leveraging price. This policy was framed o ensure that the overheads and transportation cost of the materials could be made up from the mark up. The company would then(prenominal) add a nonher mark up to ensure coverage of general expenses and voice of the company. The mark up decision was taken at the beginning of the year ground on the projected cost of the contrasting 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 traditional cost method to compute the cost of the product provided 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 military action Based equaling, the company has not been able to cost the products realistically. This has withdraw to mispricing of the products and accompanying overall issue to the company. The circumstance that an add-on in sales has not prolong to an developmentd get, instead, it has resulted in adjoin losings has exposed the limitations of the cost report organisation of the company. The company has not been able to increase its profits.This has led the management to believe that the existing cost accounting transcription has round serious flaws which needs to be rectify on an immediate basis so as to avoid making corky decision atomic number 82 to losses to the company. The company should now be contemplating the go foration of natural process establish be organisation so as to ensure prissy enter of information which will lead to optimum decision making for the company as a whole thus impart to the growth of the company through increased profitability. The key issue presented in face of the management is the possible steps to be taken by the management in order to avoid such losses. tiny Thought The issue addressed by the accounting frame of Dakota office products invites our help to the premise of Activity Based costing methodology. We atomic number 18 certain about the occurrence that the accounting and reporting brass at Dakota Office Product is contradictory and is in the lead to the company making wrong decision ultimately leading to losses. This was app bent from the establish where the company was able to increase its sales without a corresponding increase in the profits for that particular year.Activity base costing system is an approach which seeks to assign 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 reverting of some of the expenses. ABC costing system seeks to overcome 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 effectual insights to the management as to the activities which are leading to the cost by identifying the cost device drivers, rank and th e number of activity undertaken. This can also help the management redesign the operative system such that the costs associated with the products are reduced. We must also note that the traditional method of costing adapted by Dakota Office Products are typically knowing for companies who are transactions with only a single product, or homogeneous products. and Dakota Office Products have come to a stage that they are dealing in bigeminal products such as piece instruments to copier to pages, thus it makes the traditional costing method even more airy 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 mercantile system 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 readiness in the future. The existing system of the company involves use of many activities and the company has been able to regularize the operations of the company and is light-colored about the operational goals that need to be fulfilled by the company. The company is dealing in an industry where the products are preferably heterogeneous in nature and once the products are purchased there is very small-scale scope of application of direct materials or labor.The major cost that is expected to be incurred is the overhead costs which are genuine dependent upon the number of activities undertaken to accomplish the task. The cost drivers need to be ascertained onward the application of the cost drivers to the number of activities imputable to the product as regards the particular activity. leap out 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 exercise is to let the management be aware(p) 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 mode by which the company could remedial action so that the managements direction is towards the right direction. The riff solution available to the company could be enlisted as follows Increase in sell price of the products Review the accounting influences and implement the change required in accounting procedures Discontinue the product which reports a loss We will make a apprise study of the above alternatives before forming an vista on any of the alternatives.As the company is operating in a rivalrous market, so an increase in selling price of the products is expected to have outlying(prenominal) reaching repercussions in the sense that the company could go on to lose clients and contracts which could lead to even lower sales and high losses. Moreover, the existing accounting procedure is inappropriate to produce the actual cost of the product. The enumeration of actual cost of the product is distinguished 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 account 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 punctually 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 t o be discontinued. However, the decision of the product to be discontinued lies with the management and the accounting system. As mentioned earlier, the accounting 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 mixed products as well as the costing of servicing various clients.Implementation Measures and come after 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 fuss 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 detected by the traditional costing system).We need to identify the activities on which the cost is dependant, in o rder to calculate the cost driver rate. The following are the activities identified Processing of Cartons (Activity 1) Service Involving ground legal transfer (Activity 2) Order Handling (Activity 3) data Processing and intro (Activity 4) Activity 1 hail of spendings = Warehouse Personnel Expense (90%) + Items Purchased = 90%*2400000+35000000 = 2160000 + 35000000 = 37160000. Activity device driver (Processing of Carton) = 80000 Cost driver place 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 + consignment = 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 E xpenses = Order Entry Expenses = 800000 Activity Driver (Orders Line) = 150000 Cost Driver Rate for Activity 4 = 800000 / 150000 = $ 5. 3 per line. The implementation involves computing the profitability of the devil clients A Sales Cost realize Margin 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 info Entry 5. 33 Total Cost 319. 8 94444. 8 959. 4 1095 67. 7 5567. 7 1020 8. 3 0 5500 division 8555. 204 The following are the main causes of conflict in profitability between the 2 customers Customer B has a desktop deliver of 25 whereas customer A has none. The number of data entry 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 allot More Effectively. http//costkiller. net/tribune/Tribu-PDF/Using-Activity-BasedCosting-to-Manage-More-Effectively. pdf Rockford Consulting, retri eved March 21, 2011, from http//rockfordconsulting. com/activitybased-costing%20(ABC). htm harbor based management, retrievd March 21, 2011, from http//www. valuebasedmanagement. net/methods_abc. hypertext mark-up language Dakota Products Case Office Analysis Course BUSA 5061 Managerial Accounting Students Name Teresa Willette Professors Name Dr. Conner/Dr. Pollard Date 3/20/2011