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Dakota office Problem Solution

Autor:   •  November 27, 2017  •  Case Study  •  677 Words (3 Pages)  •  815 Views

Page 1 of 3

1.        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.

2.        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

(USD)

Ref of cost given in column: 4

Unit Cost

(USD)

1

2

3

4

5

6

A

Handling of cartons in Warehouse

80000 cartons

4160000

Para 3(a)

52/ Carton

B

Shipping of cartons by freight

75000 cartons

450000

Para 3(b)

6/ carton

C

Desktop delivery

2000 dly

440000

Para 3(c)

220/ dly

D

Set up of manual order

16000 orders

160000

Para 3(d)(i)

10/order

E

Enter individual lines of each order

150000 lines

600000

Para 3(d)(ii)

4/line

F

Validate EDI orders

8000 orders

40000

Para 3(d)(iii)

5 / order

G

General & Selling Expense

USD 42500000 of Annual Sales

200000

Para 3(e)

0.47% of sales

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

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

  1. Cost of Warehouse excluding personnel is USD 2000000
  2. Only 90% of warehouse personnel are used for handling of cartons in warehouse. So personnel expense towards the same is 0.9 X USD 2400000 = USD 2160000.
  3. Total expense is USD 2000000+USD2160000=USD4160000.
  1. Cost of freight for shipping cartons is given as USD 450000 in exhibit 2.
  2. Desktop delivery:-This also has two constituents. Cost of labour used to drive the trucks and expense incurred on running of trucks.
  1. 10% of warehouse labour is used for desktop delivery. So the cost of labour for desktop delivery is 0.1XUSD2400000=USD240000.
  2. Delivery truck expense as given in exhibit 1 is USD200000.
  3. Total cost for desktop delivery is USD 240000 + USD200000 = USD440000.
  1. Data Entry Costs:-Total cost of data entry is USD800000. The entire data entry operation has taken 10000 hours in the year, amounting to USD80 per hour. The activities comprising of data entry are as given below.

Table 2

Sl. No

Activity

Usage hours

Cost incurred @ USD80 per hour (USD)

(i)

Set up of manual orders

2000

160000

(ii)

Enter individual order lines

7500

600000

(iii)

Validate EDI ? Internet orders

500

40000

  1. General & selling Expense is given in exhibit 1 as USD2000000.

  1. The next step is to calculate the cost incurred by customer A and B using the unit cost derived in table:1.Same is shown in table 3 below.

Table 3

Sl. No

Services Availed

Customer A

Customer B

Qty

Cost (USD)

Qty

Cost (USD)

(a)

Handling of cartons in warehouse @ USD 52 per carton

200 cartons

10400

200

10400

(b)

Shipping by commercial freight @ USD6 per carton

200

1200

Nil

Nil

(c)

Desktop delivery service @ USD220 per delivery

Nil

Nil

25 dly

5500

(d)

Set up of manual orders @USD10 per order

6 orders

60

100 orders

1000

(e)

Entry of lines in manual order @ USD4 per line

60 lines

240

180 lines

720


(f)

Validation of EDI orders @ USD5 per order

6 orders

30

Nil

Nil

(g)

General & Selling expense @ 0.47% of annual sales

Sales worth USD 103000

484

Sales worth USD 104000

489

(h)

Credit charges @ 10% per annum on receivables

USD 9000 for 1month

75

USD 30000 for 3 months

750

(j)

Total Cost

USD 12489

USD 18859

...

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