Indian Institute of Management, Ranchi

MBA(2021-23), Section-D

Managerial Accounting Assignment-1

Colorscope Inc. Case Study Solution

Group 2
Shreyas Bhoite (M404-21)
Arindam Mandal (M335-21)
Aryanika (M337-21)
Moinak Ghosh (M369-21)

Submitted to:
Professor. Kamran Quddus
30th October 2021
 Case Summary

Colorscope Inc., founded by Andrew Cha in March 1976, is a graphic arts firm situated in
southern California specializing in special effects photography and pre-press processing.
Because of the strong ties Andrew Cha had created with significant participants in the
marketplace and the company's industry-renowned efficient operating method, the company's
service was regarded as an excellent service provider.
Colorscope witnessed a massive upheaval in the business landscape in the late 1980s due to a
technical revolution in the microcomputer industry. With the backward integration of huge
printing businesses and the closer relationship of standalone pre-press companies with their
clients, the competition got fiercer overnight. Clients bringing up in-house design and pre-
press procedures also caused 1Cha's "strong business relationships" to disintegrate.
Because desktop computers and color separation software were widely available by the mid-
1990s, the price of specific projects dropped by more than 50%, and Cha, who was already
facing severe competition out of nowhere, had to suffer a loss of profits as a result of the
willingness to pay and high production costs incurred due to his ostensibly "technologically
advanced" production equipment and high direct labor expenses. In brief, many difficulties
drove Andrew Cha to question what he could do to reduce operating costs, design a better
pricing strategy to expand Colorscope's customer base, and what type of accounting and
control system he should use.

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 How could Colorscope improve its operations?

Colorscope's operations can be improved by educating staff and upgrading

technology/equipment to make them faster and more efficient and become more profitable in
the long run by developing a plan to combat rework, such as not doing it at all or charging a
fee for customer-requested rework. Colorscope's operations and profitability can be improved
by reallocating high-skilled personnel to a workplace and implementing the "right man, right
place" method. Further, we suggest that-
1. Scanning, Assembly, and Output are the biggest avoidable cost drivers in operations
due to high reworking costs, among the five key processes. As a result, Colorscope
should employ additional quality control at those procedures to limit the number of
reworking costs.
2. We discovered that personnel in task preparation appear to have a lot of idle time
(73.13% capacity utilization). In contrast, Colorscope's scanning (95.63% capacity
utilization), Quality Control(91.88% capacity utilization) and assembly (90 percent
capacity utilization) operations appear to be close to full capacity. We find a link
between full power and the numerous errors that necessitate rework in certain areas.
To address this problem, we recommend enlisting the help of experts who work in job
preparation to assist staff with scanning and assembly. This will reduce stress and, as
a result, errors that result in more rework.
3. Furthermore, we observe that the idle capacity of the floor space is a crucial cost
component (13000 USD) that must be addressed, as this cost is not allocated to any
task and has a substantial impact on Colorscope, Inc.'s profitability. As a result, we
recommend moving to a smaller area to maximize space use while lowering rent
costs.
At Colorscope, the workflow began with receiving orders over the phone and then entering
the specifications, which could result in some data being misconstrued or incorrectly entered,
necessitating rework on the task until it was finished and sent to the QC Department. Because
the receiving and recording of the assignment was the first stage of work, any errors at this
stage necessitated repeating the entire procedure to rewrite the task. In the next phase of the
process, the graphs, photos, and text were physically cut and pasted into picture templates.
Three laser scanners were used in the scanning procedure, and the assignment was handed to
the assembly department once it was completed. The assembly was carried out using
antiquated and outmoded technology, resulting in lower product quality and higher costs.
New technology should be introduced to be competitive in the printing sector, and work
should be monitored to identify needed improvements.

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 How could it change its pricing strategy?

Colorscope quoted roughly the same per-page price for different customers plus additional
charges for special effects despite customers posing other demands on organizational
resources, which was not correctly reflected in the price charged. While charging overheads
to jobs, costs incurred at every process must be accounted for and set accordingly per the
activity responsible for the cost. To accommodate such a costing mechanism, Colorscope
could have opted for activity-based costing methods where the overheads are allocated as per
their respective cost drivers between every process.
Colorscope should allocate the overheads to all the cost pools (5 departments) and then to the
respective jobs using appropriate cost-drivers. The company already tracks material, Wages,
and depreciation expenses for the individual processes. For rent expenses (Ex. 11), floor
space would be a suitable cost driver, and hence rent can be assigned to the various methods
in the ratio of floor space. Since wages are a prominent part of the cost, 'Other overheads' can
be allocated according to the labor hours (Ex. 9). Next, we give prices from the overhead cost
pools to each job using labor hours, which seems reasonable as labor costs exceed any other
cost. Hence, we can calculate overhead rates for each process. Finally, after allocating
reasonable expenses to the specific jobs, Colorscope can charge a margin on top of it. For
rework requested by the customer, the firm can charge a premium rate which could be
conveyed to the consumer initially.
Finally, to calculate profitability for each job:
Revenue – Direct Costs – Allocated Overheads = Margin.

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 What accounting and control system should the company install?

Activity-based costing can be used as an accounting system to determine the base price of
each task performed by comparing the work to the cost consumed by each process. Therefore,
each function is evaluated in terms of its performance and the cost used.
Control systems must be in place to ensure proper and smooth operation at all stages of the
production process.
The Colorscope workflow is well standardized but undocumented. It must be documented
and communicated at all levels of the production process. Therefore, it makes no sense to
deviate from the standard procedure.
We also need to send the customer's specifications to each manufacturing process to match
the work completed at each step. This minimizes the possibility of redoing.
All employees are comprehensively trained and can perform activities throughout the process
without additional training, so tasks must go through a quality control process at each stage
before moving on to the next step. This helps minimize the redo suggested by the quality
control department in the final stages. Supervisory controls should be applied at all stages of
the process as part of the internal control system to review the processes connected with
individual performance and job completion and take corrective action based on their
oversight.