Question:Chapter 7 Case Study - Activity Based Costing

"Does charging a uniform price to all customers really make sense?" This was the question that Lori Peters, founder and CEO of One Stop Shop (OSS), asked her management team. "Charging a uniform price assumes that all customers are the same in terms of the resources they consume; this can't possibly be true." Ralph Goodwin, the chief operations officer, couldn't agree more. Sarah Price, the accountant, jumped in to add that her new activity-based costing system accounts for the differences in the resources consumed by different customers. "Our new costing system does not allocate costs based on the dollar value of orders; we now capture the number of transactions, by customer, of the four major activities involved in satisfying our customers." While acknowledging the new system, Goodwin still did not believe that the new system actually captured the resources required to cater to the different customers' needs. "The resources required to cater to each customer's needs vary considerably, and the number of transactions is at best a somewhat poor proxy for this." The meeting ended with Price agreeing to review her costing system.

Upon returning to her office, she went through the data for the previous year (20X4) and listed the following information pertaining to OSS's four major customers (A, B, C, and D), who account for well over 85% of the company's orders:

Activity Amount TransactionsActivity Rate

Order Taking$1,685,000.00 28720 (number of orders received)$58.67

Inspection$1,740,000.00 36810 (number of inspections received)$47.27

Packaging$1,760,000.00 452500 (number of packaging's received)$3.89

Shipping$2,325,000.00 186450 (number of shipping received)$12.47

Total$7,510,000.00

Company A Company B Company C Company D

Number of orders received9,5607,4005,2006,560

Number of inspections received6,5009,1207,45013,740

Number of packaging received98,600125,68084,600143,620

Number of shipping received51,00040,90056,35038,200

Upon further reflection, she decided to investigate the four activities to determine whether number of transactions is really a poor proxy, as Goodwin had commented. After completing her investigation, she prepared the following additional table, which captured the time consumed for each activity:

A Hours B Hours C Hours D Hours Total Hours

Order - taking time80,200130,800110,46088,790410,250

Inspection Time 88,290123,870101,200186,640500,000

Packaging Time 95,460185,460125,420143,660550,000

Shipping Time 206,100162,940226,700154,260750,000

Guide Questions:

Sarah Price has approached you to help her response to the concerns raised by Peters and Goodwin. Analyze the costing system and report whether using different measures of activity volume will lead to differences in the costs allocated to the four customers. Explain the reasons for any differences. What will you recommend to senior management with respect to improving the costing system?

Deliverable

present outlining your recommendations on a revised cost system. The senior management team does not want you just answer the guide questions so organize your presentation by stating the issues in the case, preparing a quantitative and qualitative analysis, and providing value added recommendations that will improve the company's profitability in the future.

thank you