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Case

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Colorscope, Inc.

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scanning. we have to first allocate overhead to the cost pools (the 5 departments). then cost can only be determined then For Colorscope. and why? A2) • • Reputation for quality – poor quality is extremely costly because o Pre-press is the last stage at which an error can be detected o Mistakes in advertised price can be expensive for content provider to honor o Merchandisers take great pride in their catalogs o Fast turnaround – this is very valuable to the content provider because it gives them more time to decide. so this is an illustration of actual costing Q3) How many overhead cost pools are appropriate for Colorscope? A3) • • Q4) The 5 departments – preparation. output and Quality Control These are the major stages in the production process. and hours are not clocked in these departments in fixed proportion (Exhibit-9) How do we determine the amount of overhead in each overhead pool? A4) • In this case. and then allocate overhead from the pools to the jobs Page 2 .e. how much to discount which items (i. as opposed to budgeted data. assembly. we have actual. it gives them more time to observe their competitors actions in a fluid environment Actual costing differs from normal costing in that overhead allocation rate = actual overhead / actual volume of base o This is ex post allocation rate – if actual overhead will not be known till year-end. for example. and erosion of rents (high margins) What has Colorscope’s competitive advantage been.Analysis Q1) What is the external environment that Colorscope currently faces? A1) • • • Q2) Cheaper technology is lowering entry barriers Better technology is eroding quality-based competitive advantage Intense competition from: o Small stand-alones o Large national chains o Backward (vertical) integration by large printers o Intense price pressures.

since this is available First Stage Allocation Description Wages Preparation Scanning Assembly Output $8000 $32000 $64000 $10000 Page 3 Quality Control $11000 Idle Space Total $125000 .• This is called 2-stage allocation system 2-Stage Cost Allocation System Begin with first stage allocation • • • • Wages are already tracked by department (Exhibit-11) Equipment depreciation is also tracked by department Rent has to be allocated to the departments o Using floor space as the allocation base makes sense “other” overhead has to be allocated to the departments o We could use labor hours as the allocation base.

Depreciation Rent Others (1)Total Overhead (2)Labor hour Overhead rate per labor hour (1)/(2) Floor Space in square feet $500 $2000 $1311 $11811 160 $25000 $2000 $5246 $64246 640 $10000 $8000 $10492 $92492 1280 $14000 $4000 $1639 $29639 200 $500 $1000 $1311 $13811 160 $74 $100 $72 $148 $86 1000 1000 4000 2000 500 $13000 $50000 $30000 $19999 $224999 6500 15000 $13000 Second Stage Allocation In the second stage. so labor hours will be a more important cost driver of overhead in this case We have to calculate allocation rates for each department Now we can calculate job profitability • This is just revenues – total costs = revenues – direct costs – allocated overhead Page 4 . since it is similar to machine hours Which is a better choice? o Cost of labor far exceeds depreciation. we allocate from the overhead cost pools to each job • • • Using labor hours seems reasonable Equipment depreciation is another possibility.

000 $600 $1.000 1110 13049 18065 4744 2588 -$2.400 296 2008 2890 1186 604 $416 61601 $20.415 61204 $20.900 296 2008 2818 593 259 -$73 61702 $10.600 $5.000 $2.200 $8.133 61002 $9.153 61003 $23.200 $16.600 $7.640 61502 $11.209 61801 $4.000 $400 148 502 795 297 86 -$1.000 $3.000 $3.000 $1.000 $3.800 $1.192 61102 $11.500 $6.900 296 2208 2601 593 431 $770 61405 $9.464 62001 $0 $200 -$200 74 100 145 148 86 -$753 Total 8658 61430 83244 24165 12683 $50.800 $10.000 $3.400 $18.300 $19.512 61404 $9.957 61501 $11.000 $1.000 $3.800 $2.172 Page 5 .100 222 2409 2746 1186 690 -$1.000 $3.700 $300 148 502 867 148 86 -$1.000 370 1405 2312 593 345 $974 61402 $8.175 61202 $23.200 296 3212 3035 1186 604 -$4.000 $1.000 $1.556 61401 $7.000 $2.200 296 1606 2168 593 345 $5.100 296 2008 2457 593 259 -$1.700 518 3212 4191 1186 431 $10.900 296 1907 2312 1186 604 -$1.000 $1.500 $9.000 $7.000 $2.500 296 2008 2963 593 431 $1.600 $2.000 $2.452 61902 $12.000 $13.637 61201 $11.300 $16.800 296 2008 2601 593 345 $1.400 $4.274 61602 $2.162 61203 $22.700 518 2610 4336 1186 777 $7.100 $4.000 $3.500 $7.500 $18.600 $3.600 444 3413 4625 1186 518 $8.800 444 3011 4191 1186 690 $7.400 74 502 795 297 86 $646 61901 $2.172 Unused Floor Space $13.000 $4.800 296 2108 2818 593 345 $2.485 61101 $12.277 61301 $50.500 296 1606 2023 593 345 $4.800 $6.500 $9.200 $9.800 370 1907 3035 593 431 $3.Job# Revenue (1) Total Material Expense (2) Gross Margin (1)-(2) Prep Scanning Assembly Output Quality Control Net Profit 61001 $9.000 $2.428 61701 $8.100 $5.400 $1.400 148 502 723 148 86 -$207 61603 $1.500 296 1606 2312 593 518 $4.900 $4.405 61403 $8.000 Net Profit $15.100 $6.849 Total $28.000 $37.021 Idle Time 3182 2811 9249 5485 1122 -$21.500 518 4015 5420 2372 690 $5.

000 $1. on the horizontal axis from most profitable to least profitable (or most unprofitable) What is the cost of rework? Rework due to change in specifications by customer Job# 61001 61002 61301 61502 61801 61901 Material Expense for rework $2.182 $2.724 $1.000 $1.488 Quality Control initiated rework of house errors Job# 61301 61402 61403 61603 Material Expense for error correction $1.000 $1.000 $1.264 Page 6 .464 $1.Examine job profitability whale curve The output from an ABC customer analysis is often portrayed as a whale curve • A plot of cumulative profitability versus the number of customers • Customers are ranked.100 $1.500 $1.000 $500 Prep Scanning Assembly Output Quality Control Total Hours Total Cost 1 0 0 1 3 9 10 3 4 16 14 3 1 2 2 1 1 2 1 0 10 29 27 8 $1.520 $3.784 $3.922 $3.390 $1.700 $1.888 $2.000 Prep Scanning Assembly Output Quality Control Total Hours Total Cost 0 0 2 1 0 1 16 8 5 4 1 1 10 6 10 8 3 4 4 4 2 1 1 0 2 3 2 0 0 0 32 21 21 14 5 6 $5.

353 $858 $672 $547 $425 $398 $427 $401 $425 $398 $411 $427 $588 $595 $514 $490 $523 $661 $398 $552 $707 $505 $549 $838 $863 $534 $753 $14.600 $23.405 -$1.000 $11.000 $7.400 $8.966 .957 $2.175 $10.150 Cost per page of rework not there $12.Cost per Page Job# Pages Net Profit Profits/ Page (1) Revenue Revenue/ Page (2) Cost/Page (2)-(1) 61001 61002 61003 61101 61102 61201 61202 61203 61204 61301 61401 61402 61403 61404 61405 61501 61502 61601 61602 61603 61701 61702 61801 61901 61902 62001 Total 16 16 32 16 16 16 32 32 32 128 16 16 16 16 16 16 16 32 4 4 16 16 4 4 16 1 545 -$4.153 $5.800 $11.000 $1.000 $50.021 -$258 -$72 $171 $325 $290 $261 $318 $263 $227 -$20 $61 -$88 -$95 $48 $122 $165 $26 $227 -$52 -$357 -$5 $76 $162 -$363 $216 -$753 $896 $9.000 $11.274 -$207 -$1.637 $4.485 $5.000 $23.277 -$2.556 $974 -$1.000 $20.000 $20.000 $2.415 $7.000 $0 $315.000 $4.428 -$73 $1.192 $4.000 $2.133 -$1.209 $646 -$1.457 Customer Rework/ Page (3) House Rework/ Page (4) $362 $199 $23 $220 $212 $170 $316 $366 $372 $1.162 $8.452 $3.491 What should Colorscope do about the cost/quality tradeoff? • • • • • • • Price customer initiated rework Restructure production sequence: prep -> scanning -> QC -> assembly -> output -> QC Short term: cost can be bear by the company Long term: customer initiated rework should be charged In house errors should be reduced Identify error at the scanning stage itself so it can be checked earlier Share rework cost with the customer Page 7 $15 $763 Profit before Rework (1)+(3)+(4) $103 $127 $171 $325 $290 $261 $318 $263 $227 $18 $61 $132 $117 $48 $122 $165 $196 $227 -$52 -$41 -$5 $76 $528 $9 $216 -$753 $3.000 $22.464 -$753 $50.000 $10.512 $770 $1.800 $8.000 $11.600 $9.000 $12.000 $12.640 $416 $7.000 $500 $750 $0 $15.000 $8.000 $9.000 $9.200 $600 $600 $719 $750 $688 $688 $719 $688 $625 $391 $488 $500 $500 $563 $613 $688 $688 $625 $500 $350 $500 $625 $1.