TentCity Cost Drivers Introduction TentCity manufactures and sells camping-related items produced in four divisions: tents, sleeping bags, netting, and hiking items. TentCity was incorporated in 1998, employs approximately 600 people, and is publicly traded. They currently sell only through distributors such as REI and Cabelas and generate approximately $30 million in annual sales. TentCity is located in Kansas City, MO. Managers of each of the four divisions are responsible for controlling costs, both direct and applied. Den Davis, TentCitys Chief Operating Officer (COO) is always thinking about costs and how they affect product mix and product-pricing decisions. TentCity uses a standard costing system and manages costs using variance analysis. Some of the production managers in specific areas have questioned the assumptions used to generate this cost information and Den has called a meeting of several production department managers, including Jamie Jones, Tents; Morgan Mann, Sleeping Bags; Tracy Travis, Netting; and Taylor Tritt, Hiking Products. Since the purpose of the meeting is to review how the production costs are accumulated for each of these products, Den also invited Hayden Hall, Chief of Cost Accounting and Jessie James (no relation to the famous outlaw), a Business Analyst in the Information Technology Department who has worked with Hayden developing and implementing the costing elements of TentCitys accounting system. Initial Costing Meeting Den: I called this meeting to make sure were staying focused on controlling our costs. I think thats key to increasing TentCitys value and making sure we pay competitive wages so we can continue to hire the best workers we can find. Tracy: Well, we all have a pretty good handle on our materials and labor costs. What drives me crazy is the overhead number. I dont want to look dumb, but Ive never understood what that is and where it comes from! Morgan: Youre not dumb, Tracy. I remember when I first saw overhead on my performance reports and wondered what the heck it was. Jamie: When I asked Hayden about overhead, I think the explanation was every tent is sold for a slightly higher price because someone has to clean the restrooms every night and we have to replace light bulbs when they burn out. So, my performance numbers take a hit every month for these costs? Hayden: Essentially, that is exactly the case. Taylor: It just doesnt seem fair. I am held accountable for costs incurred in my department, so I go crazy trying to hire the best employees we can find who work fast and dont make mistakes. I also work hard to use materials in ways that nearly eliminate waste. Im killing myself devising and managing every cost I can control and should be rewarded for those accomplishments, but instead, I get hit with this overhead charge for costs that nobody seems to be responsible for! Hayden: Hey, dont shoot the messenger here! I know each of you production managers is on top of direct labor and direct materials costs. You are all experts in your processes and make great decisions each day about who will work the lines and what materials and supplies you should be using. But, in addition to those direct costs, the company has to cover its indirect costs. Den: Yes, most managers dont think about indirect costs at all. Hayden: And why would you? The cost of a fork lift (and its operator) that moves materials in from the warehouse or all the small, hard-to-track costs of thread and sewing machine needles arent big enough to get attention, but they add up, as do costs of insurance, depreciation, electricity, janitorial services, and property taxes. Unless youre an accountant, you just dont think about these things. Den: And it would be great to know more about which products, processes, and/or departments benefit from these overhead costs. It would be great if we could find ways to predict these costs more accurately and apply them fairly. Morgan: Hayden, did you say that electricity is a part of overhead? Hayden: Yes, electricity is overhead for us because we dont meter usage into each department or process. We considered adding meters a few years ago but decided that our processes each use about the same amount of energy per item, so we didnt see enough use benefit to justify the cost of separate meters. Jamie: Is that true no matter what the temperature is outside? Hayden: Im not sure we looked at that. Tracy: Why did you ask that, Jamie? Jamie: Well, I know that the electric bills for my house are higher when I run my air conditioner in the summer, but lower when I heat with gas in the winter. Wouldnt we see patterns like that in our electric bills for the business? Morgan: Makes sense to me. And in Sleeping Bags, I could control electricity use by adjusting and maintaining my cutting and sewing machines but would have no control over how cool the plant is kept. Den: Hayden, can we pull together some data that could help us all understand how electricity cost behaves throughout the year? Hayden: Well, we have some of the data wed need I think. Jessie: You are talking data analytics here. I know this is the new big thing, but I dont think anybody in IT has this skill set. Hayden: I learned some data analytics in school and Ive been reading about it in the accounting journals a lot lately. Jessie: Well, I know how to pull data out of our system. If you lead the way, I can work with you on this, Hayden. Requirements The managers need help understanding how temperature affects electrical consumption, and thus their overhead costs. They arent currently using meters, so each department gets charged a percentage of the electrical consumption, and thus its important to understand what drives that cost. Consider how you might approach the request for better cost information concerning electrical consumption. You have seen the four-step approach below, so its repeated here in a slightly shorter format. It will help you establish a solid direction for your analysis and reporting. The file provided have electricity consumption data at TentCity, but you should be thinking about what other data you might need. For instance, since the conversation hinted at a link between temperature and electrical consumption, consider where you might find temperature data. Apply the analytics mindset: Ask the right questions Extract, transform and load relevant data (i.e., the ETL process) Apply appropriate data analytics techniques Interpret and share the results with stakeholders ASSIGNMENT PART 1 QUESTIONS: 1. Ask the right questions: a. What is the issue or opportunity that we are trying to resolve? Are the managers interested in reducing costs, or understanding how to allocate costs? b. Who is our audience? c. What will the audience require of us? d. Who are the stakeholders? Are they different than the audience? 2. Extract, Transform and Load the data a. What data do we need? b. Where is the data and how do we get it? (Remember to think in terms of the scenario, not the fact that your instructor gave you the data.) c. What needs to be done to get the data ready for analysis? d. How do we cleanse the data? e. What are the initial data characteristics? 3. Analyze the data a. What data analytic techniques might be helpful in this managerial cost example? b. What software tools do you think you could use to perform this analysis? If you have multiple ideas, which do you think is the best? Write a report to the audience you identified, detailing your findings. 4. Prepare a report that communicates your findings. The report should be addressed to Den Davis, and should clearly explain the steps you took, the analyses undertaken, the results of these analyses, and the significance of your results. Remember, the reason for your analysis is to help department managers understand the behavior of the costs they incur. These managers are not statisticians nor accountants. ASSIGNMENT PART II Step it Up! Critical Thinking Issues There are many other factors that contribute to indirect costs at TentCity. Den and the other managers will appreciate any information on how they can manage their costs, so prepare a second section of the report above that discusses other potential areas for cost containment and how data might be obtained to analyze the cost behaviors. You do not need to do the analysis but make suggestions to the management team about what would need to be in place to implement your suggestions. Dont simply answer the questions below. Think broadly about cost drivers and what data you might need to answer the related business questions. Here are some questions to spur your creative thinking. Required Include the answers to these questions as part of your memo about items for further consideration by your audience. 1. What percentage of the electricity costs did you determine are explained by the variation in temperature in your analysis? What else might contribute to electrical usage besides the weather? Hint: Think broadly about both physical items and business processes. 2. Are there physical attributes that vary across the departments that could be used for a cost basis? For example, the floor space may be different. Could that data be used? How? 3. Are there other means of collecting electricity consumption data that could be beneficial to TentCity? Consider the possibilities of emerging technology and how such advances might be implemented. What benefits might such technologies provide? How should these be evaluated against the costs? Are there tangible and intangible benefits and how should these be evaluated? 4. At what point do such factors advance beyond accounting concerns to become plant and organizational concerns? How might the management team foster the idea that controlling costs should be everyones concern? 5. How might the management team foster the Analytics Mindset throughout the organization