Product Costing Using Activity-Based Costing and Just-in-Time: A Value Chain Approach

Wearwell Carpet Company is a small residential carpet manufacturer started by Don Stegall, a longtime

engineer and manager in the carpet industry. Stegall began Wearwell in the early 1990s after learning

about ABC, JIT, total quality management, and several other manufacturing concepts being used suc-

cessfully in Japan and other parts of the world. Although it was a small company, he believed that with

his many years of experience and by applying these advanced techniques, Wearwell could very quickly

become a world-class competitor.

Stegall buys dyed carpet yarns for Wearwell from three different major yarn manufactur-

ers with which he has done business for many years. He chose these companies because of their

reputation for producing high-quality products and their state-of-the art research and development

departments. He has arranged for two carpet manufacturing companies to produce (tuft) all of his

carpets on a contractual basis. Both companies have their own brands, but they also do contract work for other companies. For each manufacturer, Stegall had to agree to use the full output of one

manufacturing production line at least one day per month. Each production line was dedicated to

producing only one style of carpet, but each manufacturer had production lines capable of running

each type of carpet that Wearwell sold.

Stegall signed a contract with a large transport company (CTC), which specializes in carpet-

related shipping, to pick up and deliver yarn from the yarn plants to the tufting mills. This company

will then deliver the finished product from the tufting mills to Wearwell's ten customers, which

are carpet retailers in the ten largest residential building markets in the country. These retailers pay

the shipping charges to have the carpets delivered to them. Wearwell maintains a small sales staff

(which also doubles as a customer service staff) to deal with the retailers and occasionally with the

end customers on quality problems that arise.

Wearwell started selling only one line of carpet, a medium-grade plush, but as new carpet

styles were developed, it added two additional lines, a medium-grade berber carpet and a medium-

grade textured carpet. Three colors are offered in each carpet style. By selling only medium grades

with limited color choices, Stegall felt that he would reach a very large segment of the carpet mar-

ket without having to deal with a large number of different products. As textured (trackless) carpets

have become more popular, sales of plush have diminished substantially.

Required

a. Describe the value chain for Wearwell Carpet Company, and identify the parties who compose this

value chain.

b. Identify and discuss the cost categories that would be included in the cost of the product for financial

reporting purposes.

c. Identify and discuss the cost categories that would be included in the cost of the product for pricing

and other management purposes.

d. Discuss some of the challenges that Stegall will have trying to apply JIT to regulate the levels of

control at Wearwell. Suggest changes that might be necessary to make JIT work.

e. Does Wearwell seem to be an appropriate setting for implementing ABC? If so, what are likely to

be the most important activities and related cost drivers?