BookWeb, Inc., sells books and software over the Internet. A recent article in a trade journal has caught the attention of management because the company has experienced soaring inventory handling costs. The article notes that similar firms have purchasing, warehousing, and distribution costs that average 13 percent of sales. Thirteen percent is attractive to BookWeb management when compared to its results for the past year, shown in the following table:
Activity (cost) | Cost Driver | Cost Driver Quantity | % of Cost Driver for Books | % of Cost Driver for Software |
Incoming receipts ($300,000) | Number of purchase orders | 2,000 | 70% | 30% |
Warehousing ($360,000) | Number of inventory moves | 9,000 | 80 | 20 |
Shipments ($225,000) | Number of shipments | 15,000 | 25 | 75 |
Book sales revenue totaled $3,000,000 and software sales revenue totaled $2,600,000. A review of the company’s activities found various inefficiencies with respect to the warehousing of books and the outgoing shipments of software. In particular, book misplacements resulted in an ex ’a 550 moves and software had 250 incorrect shipments.
a. What is activity-based management (as opposed to cost-based management, for example) and under what circumstances is it useful? What is a non-value-added activity?
b. How much did non-value-added activities cost BookWeb this past year?
c. Cite at least two examples of situations that may have given rise to non-value-added activities at BookWeb.
d. Will the elimination of non-value-added activities allow BookWeb to achieve 13 percent as a cost percentage of sales for each of the product lines? (Show all calculations to support your answer.)
e. Do either of the product lines require additional cost cutting to achieve the target percentage. How much additional cost cutting is needed and what tools for methods) might the com use to achieve the cuts? Briefly describe them.
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