The Case Presentation of Managerial Accounting
PREPARED BY: GROUP 6
Members of Group #6
Alan Tomi –
Drazen –
M977Z227 M977Z206 M9770204
Natko –
M977Z205
Cindy M9770234
Jay May M977Z262 M977Z250
Candace M9770233
Fah M977Z223
Outline
There are 3 cases which are:
 Allied Office Products
 Chalid Wines
 Data Services Inc.
The Case Study of
ALLIED OFFICE PRODUCTS
Background
 In 1992, Allied Office Products was a corporation
with annual sales of $900 million
 Since 1988, the company had expanded into
business forms inventory management services.
 Allied embarked on a campaign to enroll its
corporate client in a “TFC (Total Forms Control)”
program.
 Annual TFC sales of $60 million in 1992.
 Forms manufacturing
 Business forms
 Specialty paper products, such as writing paper,
envelopes, note cards, and greeting cards.
Background (cont’d)
 Business forms inventory management
services – Total Forms Control (TFC)
 Warehousing
 Inventory financing
 Forms usage reporting
 Inventory control
 Distribution (pick pack and desk top
delivery)
 Allied’s philosophy is “we know what you
need…the right product at the right place at
the right time.”  a well run warehousing &
distribution network
 TFC inventory storage
 10 distribution centers
Background (cont’d)
 Current pricing model
 Clients charged flat fee on product cost, plus 32.2% of
product cost to cover warehousing, distribution, cost of
capital for inventory, and freight expense
 Sales margin
 Sales force charges average of 20% of product and services
 Individual accounts can vary from standard formula as shown
in Exhibits 4 and 5.
 TFC projected ROI 6% (1992), down from ROI 20% (1988)
Background
The Value Chain Concept – TFC
The Industry Chain
Trees
Pulp
Paper
Forms
Mfg.
Forms
Sales
TFC
Customer
Purchasing
Manager
Customer
Receiving
Forms
User
The TFC Chain
Storage &
Inventory
Financing
Requisitioning
Stock
Selection &
Pick Pack
Order
Entry &
Billing
Desk Top
Delivery
Freight
Distribution Center
Activity Analysis
Identified and reviewed six primary activities across
five distribution centers
Interviews with key staff
 Site Manager
 Warehouse Supervisor
 Data Entry Operator
Conducted activity cost analysis
 Identify cost drivers
Storage and Inventory Financing
Activity Analysis
“Don’t you think we should do something to get that old inventory moving?” Tim, Kansas City, MO Distribution Facility
 Storage and inventory management of business form
cartons
 Current cost - $1.55M
 Inventory obsolescence
 Excess inventory
 Current inventory – 350,000 cartons
 Cost of capital – 13%
 Customer does not pay for inventory until requisition
submission
Requisitioning Activity
Analysis
 Processing of orders according to customer request
 Current cost - $1.801M
 310,000 requisitions per year
 Each requisition averages 2.5 lines
Stock Selection / Pick Pack
Activity Analysis
“Almost everything is pick pack nowadays. No one seems to order a
carton of 500 items anymore.” – Rick Fosmire, Warehouse Supervisor
 Process of selecting cartons and partial cartons to
meet customer orders
 Current combined cost - $1.495M
 Stock selection - $0.761M
 Pick pack - $0.734M
 90% of all orders are pick pack
Order Entry and Billing
Activity Analysis
“I’ve gotten to the point where I know the customers so well, that all the
order information is easy. The only thing that really matters I how many
lines I have to enter.” - Hazel Nutley, Data Entry Operator
 Entry of customer order information into computer
system
 Current cost - $0.612M
 Labor intensive with all manual entry
 Requisitions submitted line by line
Desk Top Delivery
Activity Analysis
 Specialized delivery of orders to specific areas of
customer’s location
 Current cost - $0.250M
 Premium service with no additional fees
 Average time to complete – 1.5 to 2 hours
 8500 requests completed per year
Freight Activity Analysis
 Cost of shipping orders to customer
 Current cost for 1990 - $1.684M
 Charges based on a percentage of product cost,
not actual utilization
 New computer system coming online to track
individual freight charges
Exhibit 1
Exhibit 3: TFC Net Sales, 1991
80%
70.7%
70%
60%
50%
48.0%
40%
30%
19.0%
20%
10%
15.0%
7.8%
3.6%
13.0% 11.0%
7.0%
4.8%
0%
>$300,000
>$150,000
% of Accounts
>$75,000
>$30,000
% of TFC Net Sales
>$0
Exhibit 4
Exhibit 5
Question 1:
1) Using the information in the text and in
Exhibit 2, calculate “ABC” based services costs
for the TFC business.
Breakdown of Expenses
Activity Allocation
Cost Pools
Value
%
Storage Expense
$ 1,550,000
27.2%
Requisition Handling Expense
$ 1,801,000
31.6%
Basic Warehouse Stock Selections (44%)
$
761,000
13.3%
"Pick-Pack" Activity (42%)
$
734,000
12.9%
Desk Top Delivery (14%)
$
250,000
4.4%
Data Processing Expense
$
612,000
10.7%
Total
$ 5,708,000
100.0%
Warehouse Activity
$1,745,000
Activity Based Cost Analysis
Cost Drivers
Activity
Cost Driver
Units
Storage
Number of Cartons
350,000
Requisition Handling
Number of Requisitions
310,000
Basic Warehouse Stock Delivery
Number of Requisition Lines
775,000
Pick Pack
Number of Pick and Requisition Lines
697,500
Data Entry
Number of Requisition Lines
775,000
Desk Top Delivery
Number of Desktop Deliveries
Note:
* Number of Requisition Lines = Number of Requisition x Requisition Average (2.5 lines)
* Pick Pack Units = 90% x Number of Requisition Lines
8500
Activity Based Cost Analysis
Allocation
Activity
Total Cost
Total Cost
Driver Units
Overhead
Allocation
Storage
$1,550,000
350,000
$4.43
Requisition Handling
$1,801,000
310,000
$5.81
Basic Warehouse Stock Delivery
$761,000
775,000
$0.98
Pick Pack
$734,000
697,500
$1.05
Data Entry
$612,000
775,000
$0.79
Desk Top Delivery
$250,000
8500
$29.41
Total
$5,708,000
Note:
* Overhead Allocation = Total Cost / Total Cost Driver Units
Question 2:
2) Using your new costing system, calculate
distribution service costs for “Customer A”
and “Customer B.”
Activity Based Cost Analysis
Activity
Cost Driver
Customer A Customer B
Storage
Number of Cartons
350
700
Requisition Handling
Number of Requisitions
364
790
Basic Warehouse Stock Delivery
Number of Requisition Lines
910
2500
Pick Pack
Number of Pick and Req. Lines
910
2500
Data Entry
Number of Requisition Lines
910
2500
Desk Top Delivery
Number of Desktop Deliveries
0
26
Activity Based Cost Analysis
Activity
Current
Activity
Based
Customer A
Activity
Based
Customer B
Storage
$1,550.50
$3,101.00
Requisition Handling
$2,114.84
$4,589.90
Basic Warehouse Stock Delivery
$891.80
$2,450.00
Pick Pack
$955.50
$2,625.00
Data Entry
$718.90
$1,975.00
$0.00
$764.66
$10,250
$6,231.54
$15,505.56
Freight
$3,500
$2,250
$7,500
Cost of Capital
$2,350
$1,950
$6,500
$16,100
$10,432
$29,506
Desk Top Delivery
Subtotal ABC
Total
Note: * Activity Based Customer = Customer Cost x Overhead Allocation
•
Cost of Capital = 13% x Customer’s Average monthly inventory balance
•
Current Subtotal ABC = 20.5% x Product Cost
•
Current Freight = 7% x Product Cost
Current Cost of Capital = 4.7% x Product Cost
Activity Based Cost Analysis
Activity
Current
Customer A Customer B
Sales
$79,320
$79,320
$79,320
Product Cost
$50,000
$50,000
$50,000
Distribution/Services (32.2%)
ABC
$16,100
----
---$10,432
---$29,506
$13,220
$18,888
($186)
16.7%
23.8%
-0.23%
Return on Sales ($)
Return on Sales (%)
Question 3:
3) What inference do you draw about the
profitability of these two customers?
 Return on sales to
 customer A equals 18,888$ = 23,8 %
 Customer B equals - 186$ = -0,23%
 For the Allied Office Products it is much more
profitable to work with customer A, because
with the B customer, they are actually
realizing loss
 This couldn’t been seen through the current
accounting system
 When ABC was implemented, the costs for every
customer can be known separately
Question 4:
4) Should TFC implement the SBP pricing system?
 Service based pricing should be implemented
 Every customer can be charged exactly for what
they purchase
 Customers will be more satisfied with the service
 The company will know exactly what are the costs
for every customer
Question 5:
5) What managerial advice do you have for Allied
about the Total Forms Control (TFC) business?
How does Exhibit 6 relate to this question?
 Company Optimization
 Centralize data entry into single location
 Build a staffing model designed to reduce headcount, possibly by
consolidating warehouses
 Modify compensation plan to help encourage sales behavior
focused on growing customer revenue and profitability
 Implement Customer Profiling Program
 Initiate Just In Time Inventory (JIT) System with Allied (for 179
customers that represent 72% of sales)
 Incorporate purchase history into requisition process and
establish autofill order process
 Introduce customer needs assessment and cross-sell initiative
 Reduce pick-pack orders: work with Allied to reconfigure cartons
to meet top 40 accounts’ buying patterns
Thank
You
For Your Attention 