Dakota office Problem Solution
Autor: Bijaya • November 27, 2017 • Case Study • 677 Words (3 Pages) • 815 Views
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.
- 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 USD 2000000
- 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.
- Total expense is USD 2000000+USD2160000=USD4160000.
- Cost of freight for shipping cartons is given as USD 450000 in exhibit 2.
- 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 0.1XUSD2400000=USD240000.
- Delivery truck expense as given in exhibit 1 is USD200000.
- Total cost for desktop delivery is USD 240000 + USD200000 = USD440000.
- 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 |
- General & selling Expense is given in exhibit 1 as USD2000000.
- 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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