Societe Bonlieu
Vincent G. Tenchavez
m987z251
Julia Vassiljeva
m987z202
Outline
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Background
Carpentry Shop
The Products
Accounting System
– Job Order System
• Income Statement
• Calculation of Costs
• Consultant’s Advice
– New Accounting System
Outline
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Accounting System – New vs. Old
New System Pros and Cons
Change Prices?
12 More Staircases
Our Advice
Financial Situation
Background
• This case is set in a carpentry shop in
Grenoble, France in 1956.
• It was during the midst of the post WWII
construction boom.
• The owner of the business was Mr. Bonlieu
and he specialized in producing and selling
desks and staircases.
The Carpentry Shop
• The plant consisted of a lumber warehouse, a
kiln (drying oven) a drafting room, a machine
shop, and an assembly shop.
The Products – Desks
• Mr. Bonlieu felt he was in danger of losing
sales of desks.
• Desks made up half of the business.
• The prices of the desks were too high.
• But the margin on these desks was really low.
The Products - Staircases
• Mr. Bonlieu was accused of selling staircases
below cost.
• Yet the margin on staircases was apparently
good.
The Accounting System
• These anomalies in the high price of desks and
low price of staircases, when compared to
margin, led Mr. Bonlieu to have concerns
regarding his accounting system.
• The accounting system then in use was a
simple “job order” system.
Job Order System
Costs
Charge to
Direct Labor
actual labor costs incurred on
each job in the drafting,
machine and assembly shops
Supplies (screws, varnish, etc.)
each job on the basis of actual
consumption.
Overhead expenses
percentage allocation of the
labor cost charged to the job
Selling expenses
each job in proportion to sales
value
Income Statement
• In the quarter ended September 1956:
Direct Labor
1,266,000
Other Wages & Salaries
1,734,000
Total Wages & Salaries
3,000,000
Other Expenses
Total Costs
1,932,000
4,932,000
Income Statement
• In the quarter ended September 1956:
Total Cost
4,932,000
Selling Price
5,472,000
Profit
540,000
Profit Margin
9.8%
Calculation of Costs
• The overhead costs were significantly high in
relation to labor costs,
• Labor was carefully recorded and assigned,
but overhead expenses which were very large,
were allocated with very basic and simple
rules.
• This caused distortions in the charging of costs
to various jobs.
• It also made a lot of discrepancies in the
prices.
Consultant’s Advice
• Set up eight cost centers:
– Five Production Centers
• Warehouse
• Drying Oven
• Drafting Shop
• Machine Shop
• Assembly Shop
Consultant’s Advice
– Two Overhead Centers
• Administration
• Indirect Labor
– One Selling Expense Center
Consultant’s Advice
• Where possible, costs would be assigned
directly to the center in which they were
incurred.
Consultant’s Advice
• Allocation of cost are as follows:
Costs
Allocation to Cost Center
Coal
Power
100% to the oven
100% to the machine shop
Car Expenses
Building Expenses
100% to selling
(based on floor space used)
20% to the warehouse
30% to the drying oven
10% to drafting
15% to machining
25% to assembly
Consultant’s Advice
Costs
Allocation to Cost Center
Office Expense
Allocated on the basis of wage
and salary costs
Depends on which center
equipment was used
ffr300,000
ffr430,000
Depends on which center
purchased the item
ffr8,600,000
ffr4,800,000
ffr600,000
Depreciation of Equipment
Oven
Machine
Interest Expense
Machine
Oven
Delivery Truck
Consultant’s Advice
Costs
Allocation to Cost Center
Administrative Expense
25% to Selling Expense
75% to production
departments based on direct
labor
Indirect Labor
5 production departments
based on direct labor
Reclassified as direct labor
Warehouseman / Oven
Attendant
Consultant’s Advice
• Costs were also assigned in the remaining 6
cost centers based on the activity measures:
Cost Center
Activity Measures
Warehouse
m3 of lumber used
Oven
Drafting
Machinery
Assembly
m3 of lumber dried
Direct labor hours
Direct labor hours
Direct labor hours
Selling
Sales value
Accounting system
NEW vs OLD
Old system:
DESKS
price - too high
margin - too low
STAIRCASES
price - too low
margin - too high
New system:
DESKS
margin - high enough
STAIRCASES
margin - negative
Accounting system
NEW vs OLD
NEW ACCOUNTING SYSTEM
Order 28 staircases
Order 32 –
desks
Warehouse
137,7
43,0
Oven
Drafting
414,9
37,2
129,6
208,3
Machinery
285,6
1 038,5
Assembly
108,4
252,9
Supplies
48,0
30,0
Selling exp.
114,0
251,2
Total costs
1 145, 7
Selling
Profit
(1000 ffs)
Profit margin
OLD ACCOUNTING SYSTEM
Order 28 staircases
Order 32 –
desks
Drafting
18,0
100,8
Machining
101,8
370,0
Assembly
48,0
112,0
Overhead
423,1
1 469,4
Supplies
48,0
30,0
1 953,6
Selling exp.
Total cost
61,9
700,7
136,3
2 218,6
1 026,0
2 261,0
Selling price
1 026,0
2 261,0
-119,7
307,4
325,3
42,4
-11,67%
13,60%
31,7%
1,9%
(1000 ffs)
Profit
Profit margin
New system pros and cons
• Pros
– Reveals the products that actually bring loss
– Allocates costs quite equally and fairly
• Cons
– Is not that simple in use as the “job order” system
Mr. Bonlieu should adopt the new accounting system as
it seems to allocate the costs more fairly than the old
system. Moreover, it brings product costs closer to the
market level (Mr. Bonlieu was accused of selling
staircases below the cost).
Change prices?
• Mr. Bonlieu should increase price for the
staircases, as profit margin is too low (negative)
and competitors sell it at a much higher price.
• Mr. Bonlieu should keep desks’ prices the same,
as there is market demand for such price.
However, he is afraid of losing sales because of a
too high price. In this case he could either
provide some discounts for loyal customers/big
size orders or lower the price a bit if he is sure it
will increase the demand.
What if...
• ... Mr. Bonlieu had the opportunity to sell 12
more staircases at the same unit price. Should he
accept or not?
YES! He should
• Assuming that fixed costs for 16 staircases are the
same as for 4, and the capacity can be
accommodated,
the profit margin will
significantly increase.
12 more staircases...
Thousand ff
Fixed costs
Order 28 (new) –
16 staircases
408
Variable costs
2 951
Total costs
3 359
Selling
4 104
Profit
745
Profit margin
18,15%
Fixed costs:
Building expenses
Depreciation
Interest
Advice
• Mr. Bonlieu is a sub-contractor for furniture dealers
and manufacturers. He could put some expenses onto
the customers (such as delivery)
• Also, instead of buying new equipment, he could
consider renting it, as interest on equipment loans and
depreciation are quite high (19% of total costs). This
will help keep some liquid assets (bank deposit, stocks,
etc) that would earn some interest and could be easily
converted into cash if needed.
• He should search for the opportunities to use the total
capacity of the equipment in order to increase
profitability of his products.
Financial situation
• The data presented in the case study is not
sufficient to talk about Mr.Bonlieu’s financial
situation
• However, we can assume, that it is good
enough as:
1) Mr. Bonlieu was able to take a bank loan, which
shows his credibility
2) Total profit margin is 9.8% for this quarter.