Dakota Office Products
Dakota Office Products Company priced its products to the customers by marking up the purchased product cost by about 15% to cover the cost of warehousing, distribution, and freight, and adding another markup to cover the approximate cost for general and selling expenses, and profit. This pricing system was inadequate for its current operating environment since each customer required different product ordering and distributing ways which cost differently. Moreover, according to the case scenario, we know that those costs that were considered in product pricing strategy were not accurately assigned to each order and needed to be finely reallocated. So, in order to set up a better pricing system for the company and help figuring out its current business operation issue, we need to analyze its cost and profitability using the Activity-Based Costing method.
Distribution of Resource Consumption across DOP Activity Cost Pools: DOP ActivitiesActivity Cost Pools
Process CartonsShip CartonsDesktop DeliveriesManual Customer OrdersEnter individual order linesProcess EDI/internet ordersTotal Warehouse Expense(excluding personnel)100%0%0%0%0%0%100% Warehouse Personnel Expense90%0%10%0%0%0%100%
Delivery Truck Expenses0%0%100%0%0%0%100%
Order entry expenses0%0%0%20%75%5%100%
First-Stage Allocations to DOP Activity Cost Pools
DOP ActivitiesActivity Cost Pools
Process CartonsShip CartonsDesktop DeliveriesManual Customer OrdersEnter individual order linesProcess EDI/internet ordersTotal Warehouse Expense(excluding personnel)$2,000,000$0$0$0$0$0$2,000,000 Warehouse Personnel Expense$2,160,000$0$240,000$0$0$0$2,400,000 Freight$0$450,000$0$0$0$0$450,000
Delivery Truck Expenses$0$0$200,000$0$0$0$200,000
Order entry expenses$0$0$0$160,000$600,000$40,000$800,000 Total$4,160,000$450,000$440,000$160,000$600,000$40,000...
...DakotaOfficeProducts Cost Analysis
October 26, 2011 Case Analysis: DakotaOfficeProducts
1.0 Background Information DakotaofficeProducts (DOP) are regional distributors for office supplies and the major clientele served by the company included institutional and commercial clients. They deal with all types ofoffice supplies and writing equipment. The company has been able to uphold a great reputation for itself. The company has also arranged many distribution centers where the shipments were required to be unloaded and packed into are cartons then delivered directly to customers.
People / Key Players
John Malone, General Manager Melissa Dunhill, Controller Tim Cunningham, Director of Operations
1.2 Chronology of Key Relevant Events DOP introduced electronic data interchange in 1999 and in 2000 DOP started accepting orders online via its new website. The same year DOP introduced its website DOP started offering the
convenience of delivering the packages of supplies directly to individual locations at the customer’s site, this was called “desk top”. The financial results of calendar year showed that DOP sales increase yet it has suffered its first loss in history.
1.3 Key Facts The management is faced with major pricing and costing issue for its products. The...
...OfficeDakotaProductsCase Analysis Course: BUSA 5061 Managerial Accounting Students Name: Teresa Willette Professors Name: Dr. Conner/Dr. Pollard Date 3/20/2011 Executive Summary The following analysis is written for DakotaOfficeProducts to evaluate current business operations and recommend future actions necessary to ensure company success. In the analysis of the company we will identify inefficient business practices that have led to the companies first profit loss in its history. We will evaluate the companys current pricing structure, ordering methods, shipping and delivery process, and deficiencies in cash flows. For DakotaOfficeProducts (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 ten percent DOP paid to maintain its working capital line of credit for accounts receivable. Using the Activity Based Costing(ABC) methodology 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...
...Why was Dakota’s existing pricing system inadequate for its current operating environment?
DOP’s has chosen to use a traditional cost pricing system where direct and indirect costs are assigned and allocated to products and services delivered to clients. This system has proven beneficial for companies where production operations are high labor intensive and overhead costs are smaller part of total costs. Nowadays, when automation and technology are ubiquitous overhead costs make up much higher percentage and are often lumped together with direct labor costs. An ABC approach would be much more appropriate for the DOP’s business as it will calculate costs of products and services based on the activities involved and resources absorbed.
Furthermore, the DOP’s pricing system is described as ‘independent of the specific level of service developed’ which automatically signals for the cross-subsidies phenomenon where some services’ costs are understated and others overstated. This happens in companies where overhead costs are too complex for the simple overhead allocation system used as it is at DOP.
2. Develop an activity based costing system for DakotaOfficeProducts based on Year 2000 data. Calculate the activity cost-driver rate for each DakotaOfficeProduct activity in 2000.
# | Activity | Assigned cost centers | $ | Cost driver | Activity quantity |...
1 Dakota current allocates warehousing, distribution and order entry cost equally to each customer. DOP’s pricing system is generally independent of the specific level of service provided for customers. They just chose a single cost drive. However, it’s not believable and proper to use this simple method to analyze costs when costs are more complex. So we need to use activity-based cost system to chose different cost drives and allocate costs based on the activity.
2 We identify four different activities for all costs, order handling cost, ship carton cost or normal commercial shipment cost, desktop delivery cost, and order processing cost.
As we noticed, the distribution center team reported 90% of their workers proceed carton in and out of facility. So, the total cost for order handling is $4,160,000, which is the sum of 90% of warehouse personnel expense and warehouse expenses (excluding personnel). This cost only depends on the number of cartons moved in and out of storage. So the total handling cost need to be allocated by the number of cartons processed in year 2000, which is 80,000 cartons. Then we get the overhead rate for handling cost that is $52.00 per carton. We only have the freight cost that is associated with normal shipment. We divide total cost $450,000 by the number of carton shipped only through normal shipment, which is 750,000 cartons. Then, we get the overhead rate for ship carton, which is $6.00 per carton. We also have desktop...
1. Why was Dakota’s existing pricing system inadequate for its current operating environment?
Dakota’s existing pricing system was inadequate for its current operating environment because the pricing was based on traditional allocation of overheads. The result of which were that the actual costs incurred for fulfilling the orders of customers were not ascertained. There were two effects of this method. First, the overall prices of all the products increased. Second, those products that were more costly to produce were priced lower than their actual cost price.
2. Provide a brief analysis of the attached (page 2 of this document) activity-based costing system. Do you agree with the activities and/or cost drivers identified for each activity? Why or why not?
The activity based costing divides the operating costs into five different areas and allocates the overheads based on the actual costs incurred by each activity. In this case the operating costs are divided into freight, warehouse rent & depreciation, warehouse distribution, delivery truck expenses, and order entry expenses. The freight has been allocated on the basis of cartons shipped, the warehouse rent & depreciation has been allocated on the basis of the number of cartons processed, the warehouse distribution personnel cost 90% on the basis of cartons processed and 10% on the basis of...
Why was Dakota’s existing pricing system inadequate for its current operating environment?
- profits only when clients placed large orders for cartons
- real drop of profit if many clients place small orders
- wrong cost determination for individual customers
- wrong cost determination for new services provided by DOP (to small charges for the “desktop” delivery, then the actual cost of it)
Develop an activity-base cost system forDakotaOfficeProducts based on Year 200 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 o 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%*2,400,000+200,000)/2000=220 $/per carton
Activity Three: order handling
Rate=( Warehouse Expenses + Freight)/ number of orders
Rate=(2,000,000+450,000)/(16,000+8,000)=102.08 $/per order
Activity Four: data entry
Rate=Order entry expenses/Order lines
Rate=800,000/150,000=5.3 orders/per line
Using your answer to question 2, calculate the profitability of Customer A and Customer B.
Activity One: process cartons in and out of the facility –>...
Date: November 2, 2014
DakotaOfficeProducts (DOP) is a reseller and supplier of officeproducts. DOP is a regional entity. It has institutional and commercial businesses as clients. DOP has a good loyalty and customer confidence from its client. In order to increase profitability, DOP started “Desk top” delivery for its loyal customers. In this service, DOP will use its own transport vehicles to deliver to the clients on his desk tops. This service will charge little premium for convenience. According to DOP, this service should increase company’s profitability.
Value added services such as desk top deliveries
Excellent customer services
Price sensitive market
Operational budget has extra hidden cost
Encourage customer to order online
Implementing effective cost system
Manufacturers’’ distribution channel
Porter’s Five Forces
Supplier don’t have bargaining power
Differentiation based on value added services
Easy to switch supplier
High bargaining power
Threat of new entrant
Easy to enter
• Regional distributor of office supplies to institutions sand
• Comprehensive product line
• Excellent reputation
• Several distribution centers
• After customer orders received, orders were accumulated within
the warehouses and prepared for shipment
• Used commercial truckers to deliver
• New Option:
• “Desk Top Deliveries”
• Deliveredproducts directly to locations
• Small fleet of trucks
• 2% upcharge on products
Pricing of Products
• Markup purchased cost by 15%
• Then add markup to cover cost for selling expenses, and
allowance for profit
• Determined at start of each year based on prior year expenses
• Actual prices to customers depended on long-term
relationships and competitive situations
• Electronic Data Interchange (EDI) 2 years prior, new internet
site in 2000
• Allowed customers to order online – clerks wouldn’t have to
manually enter in.
• Many customers took advantage because of convenience
• Year 2000: operated at a loss
• Even though increase in sales, there was a loss
• First time in history
• Costs continued to rise even after introducing new innovations –
online ordering and Desktop Delivery
• Start: Look at distribution centers and understand the process
and what goes on
• 4 primary activities