Accounting

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Case 1 – Dakota Office Products

Prepared for:  Xinge Zhao

ACCT005 Managerial Accounting 

Prepared by: Group number 36

                                MA20180014 Mo Chen

                                MA20180040 Lyn Wang

                                MA20180182 Brenda Zhao

                                MA20180173 Gelia Zeng

                                MA20180107 Hirotaka Oyama

Submitted Date: October 31, 2016

China Europe International Business School

1. Why was Dakota’s existing costing system inadequate for its current operating environment? Do you think Dakota is a good candidate for adopting Activity-Based Costing (ABC)? Why?

The current costing system allocates the overhead cost, warehousing, distribution and order entry, evenly based on the units sold. For instance, Customer A and B have the same overhead costs as they both purchased 200 cartons of products. This system is inadequate because it does not reflect the real costs to delivery the products to the customers. The cost is driven by various activities involved to delivery the products. Based on the information provided, Dakota provides various methods for customer to order and receive products, such as manual order, EDI, and desk top deliveries (DTP). Each methods requires different levels of activities and in turn, different costs. Customer A and B have very different profile as their requirements for services are different. The current cost system does not take in account of the difference in activities involved to meet the customers’ requirements. The system is also inadequate because it leads to poor decision making as it is not able to identify which areas to focus or improves on. In fact, the system is very misleading as it shows Customer B is more profitable than A by the amount of desktop deliveries’ margin.

Dakota is a very good candidate for activity based costing (ABC). Firstly, Dakota has variety of activities to delivery it’s products. There are two ways to order the products, manual and EDI, which requires different types of activities and different amount of associated costs. Similarly, there are two ways to delivery the products, commercial freight and Dakota’s own truck delivery. Secondly, Dakota has a large indirect cost, 22.7% of the cost of items purchased. Lastly, based on the EDI system, Dakota has the IT capabilities to implement an ABC system.