5 billion checks written by American consumers and businesses annually than any other check printer. In fact, Deluxe printed enough checks in 2001 that if lined up end to end would stretch to the moon and back. The company serves nearly 1.8 million small businesses annually and provides 2 million products—each with personalized information, most within two days of receiving the order, with 98% order accuracy. Revenues in 2002 were $1.28 billion, with operating income of $214 million.

Deluxe was recently ranked by Fortune magazine as the 936th largest U.S. company.

Although Deluxe has been profitable in all but one year since it was founded in 1915, market shifts in 1997 from paper-based to electronic transactions were causing margins to erode and revenues to decline in Deluxe’s core checkprinting business. These competitive pressures brought about many changes at Deluxe in regards to management and strategy.

The centerpiece of all these changes to its management process was a new measure called Deluxe value added (DVA). DVA measures the incremental profits of customers and customer segments after the costs of capital assets required to support these customers are covered.

This focus on the profitability of customers was a significant change in view from the company’s previous focus on the profitability of its check products.

Measurement of DVA at Deluxe requires accurate cost information. However, at the time that Deluxe adopted DVA, Deluxe’s costing system was used primarily to value its check inventory for financial statement purposes. Hence, in 1997 the company decided to implement an activity-based costing (ABC) system to measure the costs of specific customers.

A comprehensive project structure was put into place in order to design and implement the new ABC system. An executive sponsor provided focus, resources, and leadership and reviewed performance. A steering committee approved the project plan, established priorities, and approved ongoing progress and results. Two project managers were responsible for quality control, problem resolution, leadership, and training. Field teams consisting of full- and part-time members were responsible for executing the work plan.

A multi-phased project was initiated with a time line of six months. The plan included forming project teams, analyzing activities and linking costs to customers, analyzing customer profitability, and building a sustainable ABC information system that could be updated on a regular basis as activities and customers changed.

Answer the following questions:

1. Deluxe implemented ABC over a time period of six months. Does this time period seem too short, too long, or just right? Explain your answer.

2. Upon implementing ABC, Deluxe involved teams and groups from various departments within the company. Why do you think it was important for Deluxe to involve so many employees in its implementation of ABC?

3. Is Deluxe’s approach to implementation likely to increase or decrease management’s use of ABC information for decision making? Explain your answer.

Source: Adapted from P. B. B. Turney, “Deluxe Corporation: Activity-Based Costing,” University of Virginia Darden School Foundation (1999).

42. Minuteman Enterprises You are the controller for Minuteman Enterprises, a manufacturer of rocket booster engines and various aerospace products. Though there are many commercial customers for most of the company’s products, the federal government is the only buyer of your rocket booster engines. Because you are the only provider for the engines, the government has agreed to buy these engines at a price equal to your cost plus a 10% markup.
As the controller, you have recently been studying the accuracy of your product costs.
Traditionally, manufacturing overhead has been allocated on the basis of direct labor hours.
Using this method, rocket boosters have borne a high percentage of manufacturing overhead because they take many more direct labor hours than do the other products.
You have just been presented an analysis by one of your staff members that shows that direct labor hours is not a very relevant base for allocating manufacturing overhead costs.

Rather, she has made a very convincing case that manufacturing overhead should be allocated using activity-based costing with multiple cost drivers. Using her suggested approach, however, you discover that the rocket boosters bear a much smaller portion of manufacturing overhead costs, and therefore, the total cost of the boosters is considerably less than the amount you had been using to determine the price charged to the government.
You know that her calculations using ABC are likely more accurate than the current cost allocation method and that the commercial products should bear a larger amount of manufacturing overhead costs. Yet, you also know that by using ABC and the more accurate cost drivers, your profits from both the boosters and the commercial products will be reduced.
1. What should you do?
2. Is it ethical to continue to allocate manufacturing overhead costs on the basis of direct labor hours?
3. Would it be ethical to use direct labor hours if that were the basis used by other government contractors?
4. If you decide to switch to ABC, should you inform the government that you have overcharged it and return the excess profits?