Question

Review Exercise 5-24. Discuss the key issues facing Laurent and why you might suggest they choose to investigate implementing an ABC system.

1. What is Laurent's Competitive Strategy?

2. What are the implications of the marketing initiatives undertaken by Laurent?

3. Is increased product variety an argument to consider ABC?

4. How difficult might it be to convince management?

Role of Activity-Based Costing in Implementing Strategy Laurent Products is a manufacturer of plastic packaging products with plants located throughout Europe and customers worldwide. During the past 10 years Laurent Products has successfully developed a line of packaging materials and a unique bagging system that present an important opportunity to increase the productivity of checkout counters in grocery stores. The plastic bags manufactured by Laurent are produced in several sizes and different plastic film colors and may have attractive multicolor printed designs on one or both sides to meet the specification of a particular grocery store. The advantages provided by the Laurent bagging system include the lower cost of bags and labor at the checkout counter as well as improved customer service. The system has contributed to significant growth in Laurent’s sales in recent years.

Laurent’s success in the grocery chain market has attracted an increasing number of competitors into the market. While the company has been very successful in bringing out a series of new product types with innovative labor-saving features for the grocery stores, Laurent’s competitors have eventually been able to develop quite similar products. The result has been increased competition with a substantial reduction in Laurent’s prices.

As a result of the increased competition in the grocery chain market, Laurent is planning to begin to focus on the small independent grocery stores that purchase bags from large wholesale distributors. The potential sales for this wholesaler segment is about the same size as the grocery chain market but includes a much larger number of independent store customers.

Page 163Investments in manufacturing equipment in recent years have been to support two principal objectives: to increase capacity and to reduce costs. The cost reduction initiatives principally concerned material costs and reduced processing times. Over the years, Laurent has chosen to invest in machines that are similar to existing equipment in order to capitalize on the fact that the process is relatively simple and that products can, with relatively few exceptions, be processed on any machine in the plant. The only major restriction is the number of colors that a machine can accommodate on a single pass. Future investment proposals now being considered are based on this rationale.

Answer 1

Answer to the Question No. 1.

Due to the increased competition in the grocery chain market, Laurent is planning to begin to focus on the small independent grocery stores that purchase bags from large wholesale distributors. The potential sales for this wholesaler segment is about the same size as the grocery chain market but includes a much larger number of independent store customers.

Answer to the Question No. 2.

The implications of the marketing initiatives undertaken by Laurent are include the lower cost of bags and labor at the checkout counter as well as improved customer service. The system has contributed to significant growth in Laurent’s sales in recent years.

Answer to the Question No. 3.

The activity-based costing (ABC) system is a method of accounting you can use to find the total cost of activities necessary to make a product. The ABC system assigns costs to each activity that goes into production. Thus in case of increase in number of products, it is better to understand the costing of each product separately under ABC system.

Answer to the Question No. 4.

It is sometimes difficult to convince the management due to their habitual nature to use traditional system of costing.

No one is in ease to opt for new system of working instead of old one which was in use by them for the same task.

There are difficulties hindering the application of ABC system in companies such as the difficulty of the division of business undertaken by the company to the activities of clear and specific, the lack of scientific qualifications and professional capable of implementing ABC system.