Question

Managers at Aiwa Co. have been using various teams to collect activity-based data since 2000. Each team has consisted of one or more management accountants working closely with department managers. To date the teams have mainly focused on product costing. Recently two teams have been set up to collect data to improve the company’s understanding of customer-related costs and profitability. One team has looked at distribution costs and the second at order related costs. The company has approximately 250 customers in total. Only 3 customers were included in the analysis. These 3 customers represent 10% of total sales. Finally the teams only considered labour related costs and direct costs for the cost pools. The first objective for each team was to estimate the total annual overhead cost and annual volume for each cost driver. As the company only focused on three customers the data was quickly estimated. The second objective was to estimate the percentage of each cost driver per customer. Collecting data The management accept that a ‘cost sampling’ or `snapshot’ approach is the best way to identify key activities and their costs. This technique helps the department to develop estimates of how much time is devoted to different activities. Then by using an average hourly rate for all staff managers will be able to estimate the total annual cost of an activity. The decision to use an average hourly rate for all staff will save time. Managers decided that between 4 to 8 activities should to be identified by each team. Most of the managers involved with the new teams have little experience of collecting data regarding activities and cost drivers. With some activities several cost drivers were discussed.

ABC data Team 1 - Order related overheads (Data based on 3 customers) Activity cost pool Cost driver Annual overhead cost Annual volume for for the 3 customers the 3 customers Changes to orders Number of order amendments $50,000 3,000 Pre-sales support Number of hours of pre-sales support $100,000 3,800 Post-sales support Number of hours of post-sales support $100,000 2,200 Delayed payments Number of delayed payments over 3 months $70,000 1,250 Order processing Number of orders $60,000 20,000 Invoicing Number of invoices $25,000 22,500 Team 2 Distribution costs (Data based on 3 customers) Distribution related overhead Cost driver Annual overhead Annual volume cost for the 3 costs for the 3 customers customers Storage expenses Average cartons in stock Requisition handling Number of requisitions Standard deliveries Number of standard deliveries Special deliveries Number of special deliveries Customer sales and activity analysis Customer North South Annual Sales $175,000 $178,000 $12,000 $8,500 $5,000 $12,800 5,000 10,000 3,000 500 East $173,000

This question is related to Abc analysis basically customer profitability

can someone help me with this??

Answer 1

North South East Total $175,000 $178,000 $173,000 $526,000 Activity cost pool Sales Less: Order related costs: Changes to orders Pre-support sales Post-sales support Delayed payments Order processing Invoicing Total Order related costs $23,810 $28,571 $22,222 $21,875 $8,571 $5,000 $110,050 $2,381 $23,810 $50,000 $17,857 $53,571 $100,000 $33,333 $44,444 $100,000 $26,250 $21,875 $70,000 $25,714 $25,714 $60,000 $7,500 $12,500 $25,000 $113,036 $181,915 $405,000 Distribution costs: Storage expenses Request ion handling Standard deliveries Special deliveries Total Distribution related costs Customer margin Customer margin as % of sales $4,800 $2,550 $500 $2,560 $10,410 $54,540 31.2% $3,600 $2,550 $2,000 $7,680 $15,830 $49,134 27.6% $3,600 $3,4001 $2,500 $2,5601 $12,060 -$20,975 -12.1% $12,000 $8,500 $5,000 $12,800 $38,300 $82,700 Working notes: Total North 20 16 Order-related overheads Activity cost pool Changes to orders Pre-support sales Post-sales support Delayed payments Order processing Invoicing Total Total cost $50,000 $100,000 $100,000 $70,000 $60,000 $25,000 $405,000 Ratio of allocation South East 2 20 10 30 15 20 12 10 30 30 30 50 10 10 42 56 45 32 70 100 Overheads allocation North South East Total $23,810 $2,381 $23,810 $50,000 $28,571 $17,857 $53,571 $100,000 $22,222 $33,333 $44,444 $100,000 $21,875 $26,250 $21,875 $70,000 $8,571 $25,714 $25,714 $60,000 $5,000 $7,500 $12,500 $25,000 $110,050 $113,036 $181,915 $405,000 10 20 Distribution costs Activity cost pool Storage expenses Request ion handling Standard deliveries Special deliveries Total Total cost $12,000 $8,500 $5,000 $12,800 $38,300 North 40 30 10 Ratio of allocation South East 30 30 30 40 40 50 60 20 Total 100 100 100 100 Overheads allocation North South East Total $4,800 $3,600 $3,600 $12,000 $2,550 $2,550 $3,400 $8,500 $500 $2,000 $2,500 $5,000 $2,560 $7,680 $2,560 $12,800 $10,410 $15,830 $12,060 $38,300 20 b Steps to improve profitablity of individual customers The company has performed the activity basis analysis. Activity based analysis in analysing the cost based on activities consumed It helps in following ways to improve profitability i) Eliminate non-value adding activities in the customer servicing ii) Reduce the number of activities which are incurring costs iii) Educate the employees about ABC method of costing and its implications on costs iv) Track costs incurred on regular basis and compare the same with budgets c Recommendations if company has data of all customers i) Analyse the customers based on pareto analysis rule. The pareto analysis rule is all about 20% of customers generating 80% of revenue ii) Evaluate profitablity of all customers and eliminate non-profitable customers iii) Evaluation of sales strategy at customer level and improve effectiveness of promotion strategies d Such data is needed in analysing customer wise profitablity and decision making It helps a company in below ways i) It helps in achieving profitability targets ii) It helps in decision making like continue or discontinue business with the customers iii) It helps the firm in developing long term relationship with key customers iv) It helps the firm in servicing the key customers in a better way which in turn will increase the business.