16.36: Activity-based management; cost cutting: retailer LO 16.2

Brainfodder.net.au sells books and software over the internet. A recent article in a trade journal has caught the attention of management, given that the company has experienced soaring inventory-handling costs. The article noted that similar firms have purchasing, warehousing and distribution costs that average 13 per cent of sales, which is attractive when compared with Brainfodder.net.aus results for the past year.

The following information is available:

Activity (Cost)	Cost driver	Cost driver quantity	Percentage of cost driver activity for books	Percentage of cost driver activity for software
Incoming receipts ($450 000)	Number of purchase orders	2 000	70%	30%
Warehousing ($540 000)	Number of inventory moves	9 000	80	20
Outgoing shipments ($337 500)	Number of shipments	15 000	25	75

Book sales totalled $5 850 000 and software sales totalled $3 900 000. A review of the companys activities found various inefficiencies with respect to the warehousing of books and outgoing shipments of software. These inefficiencies resulted in an extra 550 inventory moves and 250 shipments, respectively.

Required:

1. What is activity-based management? What is a non-value-adding activity?

2. How much did inefficiencies cost Brainfodder.net.au this past year?

3. Provide at least two examples of situations that may have given rise to the inefficiencies at Brainfodder.net.au.

4. Will efforts to eliminate inefficiencies from warehousing and outgoing shipments allow Brainfodder.net.au to achieve purchasing, warehousing and distribution costs that average 13 per cent of sales for each of the product lines? Show calculations.

5. Do either of the two product lines require additional cost cutting to achieve the target percentage? If so, how much additional cost cutting is needed, and what tools (methods) might the company use to achieve the cuts?