Dakota Case

DAKOTA OFFICE PRODUCTS

The reason for the company to make losses is that it is incurring costs on certain customers in excess of than what it assesses by its method of cost estimation based on general percentages. In order to find the solution, it is required to estimate the costs using ABC estimation method. Same is undertaken below.

The first step is to estimate the unit cost of services extended by the company on its value adding processes.

Table 1

Sl. No | Activity | No. of operations | Cost Incurred($) | Unit Cost($) |

A | Handling of cartons in Warehouse | 80000 cartons | 4160000 | 52/ Carton |

B | Shipping of cartons by freight | 75000 cartons | 450000 | 6/ carton |

C | Desktop delivery | 2000 dly | 440000 | 220/ dly |

D | Set up of manual order | 16000 orders | 160000 | 10/order |

E | Enter individual lines of each order | 150000 lines | 600000 | 4/line |

F | Validate EDI orders | 8000 orders | 40000 | 5 / order |

G | General & Selling Expense | $42500000 of Annual Sales | 200000 | 0.47% of sales |

Explanation of working out the cost shown in column 5 of table above is given below.

Handling of cartons in warehouse:-This has two components. Cost of personnel used in warehouse operations and cost of warehouse excluding personnel expense.

Cost of Warehouse excluding personnel is $ 2000000

Only 90% of warehouse personnel are used for handling of cartons in warehouse. So personnel expense towards the same is 0.9 X $ 2400000 = $ 2160000.

Total expense is $ 2000000+$2160000=$4160000.

Cost of freight for shipping cartons is given as $ 450000 in exhibit 1.

Desktop delivery:-This also has two constituents. Cost of labour used to drive the trucks and expense incurred on running of trucks.

10% of warehouse labour is used for desktop delivery. So the cost of labour for desktop delivery is 0.1X$2400000=$240000.

Delivery truck expense as given in exhibit 1 is $200000.

Total cost for desktop delivery is $ 240000 + $200000 = $440000....