DAKOTA OFFICE PRODUCTS

Activity Based Costing (ABC)

Dakota Office Products (DOP)
Dakota Office Products is a regional distributor of office
supplies to institutions and commercial businesses. It has an
excellent reputation for customer service and responsiveness.
Product line ranges from simple writing implements like pencils
and markers to photo-copy papers.
Operation Process
Warehouse:
a. Unload truckload shipments of products from manufacturers, and
move them into their designated storage locations.
b. After receiving customer orders, DOP warehouse personnel
accumulate the cartons of items and prepare them for shipment.
Customer ordering and validation:
a. Set up a manual customer order
b. Enter individual order lines in an order
c. Validate an EDI/internet order
Orders Delivery


Commercial Trucks.



Dakota Trucks deliver
desktop packages directly
to the customer.
Pricing Structure
Marking up the purchased product cost by 15% to cover
the cost of warehousing, distribution, and freight.
Add another markup to cover the approximate cost for
general and selling expenses, plus an allowance for profit.
The markups were determined at the start of each year,
based on actual expenses in prior years and general
industry and competitive trends.
Actual prices to customers were adjusted based on long-
term relationships and competitive situations, but were
generally independent of the specific level of service
provided to that customer, except for desk top deliveries.
Current Situation
Increase In Sales
Increase In Costs
Loss in profit for the 1st Time
in the DOPs history.



Despite introducing innovations such as desktop delivery
and electronic order entry, the DOP could not earn a profit.

Activity-Based Costing Steps

Cost Object : Orders
Primary Activities
1. Process cartons in and out of the facility
2. New desk top delivery service
3. Order handling
4. Data entry.
Consumption of Resources
Cost
Activity Cost Pools & Measures
Activity Cost Pool Activity Measure
Ship Cartons Number of cartons shipped
commercial freight
Process Cartons Number of cartons ordered
Desktop Delivery Number of desktop deliveries
Process Manual Custom Order Number of orders, manual
Enter Items Ordered (Manual) Number of line items, manual
Process EDI Order Number of EDI orders
Activity Cost Pools Percentages & Amounts
Activity Cost Pools - Percentages
Ship Cartons Process Cartons Desktop Delivery
Process Manual
Customer Order
Enter Items Ordered
(Manual)
Process EDI Order Totals
Freight 100% 0% 0% 0% 0% 0% 100%
Warehouse Rent &
Depreciation
0% 100% 0% 0% 0% 0% 100%
Warehouse
Distribution Personnel
0% 90% 10% 0% 0% 0% 100%
Delivery Truck
Expenses
0% 0% 100% 0% 0% 0% 100%
Order Entry Expenses 0% 0% 0% 20% 75% 5% 100%
Activity Cost Pools - Amounts
Ship Cartons Process Cartons Desktop Delivery
Process Manual
Customer Order
Enter Items Ordered
(Manual)
Process EDI Order Totals
Freight 450,000 - -

-
- - $450,000
Warehouse Rent &
Depreciation
- 2,000,000 - - - - $2,000,000
Warehouse
Distribution Personnel
- 2,160,000 240,000 - - - $2,400,000
Delivery Truck
Expenses
- - 200,000 - - - $200,000
Order Entry Expenses - - - 160,000 600,000 40,000 $800,000
Totals 450,000 4,160,000 440,000 160,000 600,000 40,000 5,850,000
Activity Based Costing Model


Customer Profitability
Customer Margin - Activity Based Costing

Rate/$
Customer A Customer B
Item Number of Activity Debit\Credit Number of Activity Debit\Credit
Sales

103,000


104,000
Cost of Items Purchased

(85,000)


(85,000)
Operating Costs:
Processing/Carton

52

200

(10,400)

200

(10,400)
Freight/Carton

6

200

(1,200)

150

(900)
Delivery to Desktop/Delivery

220

-

-

25

(5,500)
Process.CustomOrd/ManualOrd

10

6

(60)

100

(1,000)
EnteringItemsManual/line

4

60

(240)

180

(720)
Process EDI Order/EDI order

5

6

(30)

-

-
Interest on Accounts Receivables

0

9,000

(900)

30,000

(3,000)
Customer Margin

5,170


(2,520)
Profitability percentage(Customer Margin\Sales) 5.02% -2.42%
Differences In Profitability between
Customer A & Customer B


1. The cost of desktop delivery.
2. The processing of manual orders.
3. The cost of entering items manually.
4. The interest on accounts receivable.

Recommendations
Difference 1:
The cost of delivery to the desktop (Applying the fixed cost of the
delivery truck expenses on the Desktop delivery on the customers
who have used it will lower the profitability of these customers)

Recommendation:
Using only the shipping by commercial trucks
Make use of Dakotas truck fleet in another activities as to lower the
delivery truck expenses portion applied on theses customers
Recommendations
Difference 2 & 3:
The processing of manual orders & the cost of entering items
manually.

Recommendation:
Increase the pricing on Customer B to cover the loss incurred from
this activity.
Encourage customer B on using the EDI and the Internet for
placing their sales orders by offering them a competitive pricing
when using these two tools.
To encourage Customer B on placing bulk orders rather than small
orders, this will save the time of processing manual orders.

Recommendations
Difference 4:
The interest on accounts receivable - Customer B is consuming
much more from Customer A by applying the 10% interest Rate.
This lost amount is a cost that needs to be figured out on how to
lower it as it is lowering the cash flow and it disables the company
capability in using it in other opportunities.

Recommendation:
To have an agreement with customer B on the payments due date
by encouraging them with a price discount.
Conclusion
From applying the activity based costing the company
could find the activities lowering the profit.
It gives a base for further decision making to:
Enhance the operations,
Remove the unneeded activities,
Increase the profit.
It gives a realistic costs on the designated cost objects
(Order) in our case