1. The Case Presentation of Managerial Accounting
Prepared by: group 6

2. Members of Group #6 Group 1 Members May - M977Z262 Jay - M977Z250
 Alan - M977Z227
Tomi –
M977Z206
Drazen – M
Candace - M
Fah - M977Z223
Natko –
M977Z205
Cindy - M

3. Outline There are 3 cases which are: Allied Office Products
Chalid Wines
Data Services Inc.

4. Allied office products
The Case Study of
Allied office products

5. Background
In 1992, Allied Office Products was a corporation with annual sales of $900 million
Since 1988, the company had expanded into business forms inventory management services.
Allied embarked on a campaign to enroll its corporate client in a “TFC (Total Forms Control)” program.
Annual TFC sales of $60 million in 1992.
Forms manufacturing
Business forms
Specialty paper products, such as writing paper, envelopes, note cards, and greeting cards.

6. Background (cont’d)
Business forms inventory management services – Total Forms Control (TFC)
Warehousing
Inventory financing
Forms usage reporting
Inventory control
Distribution (pick pack and desk top delivery)
Allied’s philosophy is “we know what you need…the right product at the right place at the right time.”  a well run warehousing & distribution network
TFC inventory storage
10 distribution centers

7. Background (cont’d) Current pricing model
Clients charged flat fee on product cost, plus 32.2% of product cost to cover warehousing, distribution, cost of capital for inventory, and freight expense
Sales margin
Sales force charges average of 20% of product and services
Individual accounts can vary from standard formula as shown in Exhibits 4 and 5.
TFC projected ROI 6% (1992), down from ROI 20% (1988)

8. Background The Value Chain Concept – TFC
The Industry Chain
Trees
Pulp
Paper
Forms Mfg.
Forms Sales
TFC
Customer Purchasing Manager
Customer Receiving
Forms User
The TFC Chain
Storage & Inventory Financing
Requisitioning
Stock Selection & Pick Pack
Order Entry & Billing
Desk Top Delivery
Freight

9. Distribution Center Activity Analysis
Identified and reviewed six primary activities across five distribution centers
Interviews with key staff
Site Manager
Warehouse Supervisor
Data Entry Operator
Conducted activity cost analysis
Identify cost drivers

10. Storage and Inventory Financing Activity Analysis
“Don’t you think we should do something to get that old inventory moving?” - Tim, Kansas City, MO Distribution Facility
Storage and inventory management of business form cartons
Current cost - $1.55M
Inventory obsolescence
Excess inventory
Current inventory – 350,000 cartons
Cost of capital – 13%
Customer does not pay for inventory until requisition submission

11. Requisitioning Activity Analysis
Processing of orders according to customer request
Current cost - $1.801M
310,000 requisitions per year
Each requisition averages 2.5 lines

12. Stock Selection / Pick Pack Activity Analysis
“Almost everything is pick pack nowadays. No one seems to order a carton of 500 items anymore.” – Rick Fosmire, Warehouse Supervisor
Process of selecting cartons and partial cartons to meet customer orders
Current combined cost - $1.495M
Stock selection - $0.761M
Pick pack - $0.734M
90% of all orders are pick pack

13. Order Entry and Billing Activity Analysis
“I’ve gotten to the point where I know the customers so well, that all the order information is easy. The only thing that really matters I how many lines I have to enter.” - Hazel Nutley, Data Entry Operator
Entry of customer order information into computer system
Current cost - $0.612M
Labor intensive with all manual entry
Requisitions submitted line by line

14. Desk Top Delivery Activity Analysis
Specialized delivery of orders to specific areas of customer’s location
Current cost - $0.250M
Premium service with no additional fees
Average time to complete – 1.5 to 2 hours
8500 requests completed per year

15. Freight Activity Analysis
Cost of shipping orders to customer
Current cost for $1.684M
Charges based on a percentage of product cost, not actual utilization
New computer system coming online to track individual freight charges

16. Exhibit 1

17. Exhibit 3: TFC Net Sales, 1991

18. Exhibit 4

19. Exhibit 5

20. Question 1:
1) Using the information in the text and in Exhibit 2, calculate “ABC” based services costs for the TFC business.

22. Breakdown of Expenses Activity Allocation
Cost Pools
Value %
Storage Expense
$ 1,550,000
27.2%
Requisition Handling Expense
$ 1,801,000
31.6%
Warehouse Activity
$1,745,000
Basic Warehouse Stock Selections (44%)
$ ,000
13.3%
"Pick-Pack" Activity (42%)
$ ,000
12.9%
Desk Top Delivery (14%)
$ ,000
4.4%
Data Processing Expense
$ ,000
10.7%
Total
$ 5,708,000
100.0%

23. Activity Based Cost Analysis Cost Drivers
Units
Storage
Number of Cartons
350,000
Requisition Handling
Number of Requisitions
310,000
Basic Warehouse Stock Delivery
Number of Requisition Lines
775,000
Pick Pack
Number of Pick and Requisition Lines
697,500
Data Entry
Desk Top Delivery
Number of Desktop Deliveries
8500
Note:
* Number of Requisition Lines = Number of Requisition x Requisition Average (2.5 lines)
* Pick Pack Units = 90% x Number of Requisition Lines

24. Activity Based Cost Analysis Allocation
Total Cost
Total Cost Driver Units
Overhead Allocation
Storage
$1,550,000
350,000
$4.43
Requisition Handling
$1,801,000
310,000
$5.81
Basic Warehouse Stock Delivery
$761,000
775,000
$0.98
Pick Pack
$734,000
697,500
$1.05
Data Entry
$612,000
$0.79
Desk Top Delivery
$250,000
8500
$29.41
Total
$5,708,000
Note:
* Overhead Allocation = Total Cost / Total Cost Driver Units

25. Question 2:
2) Using your new costing system, calculate distribution service costs for “Customer A” and “Customer B.”

26. Activity Based Cost Analysis
Cost Driver
Customer A
Customer B
Storage
Number of Cartons
350
700
Requisition Handling
Number of Requisitions
364
790
Basic Warehouse Stock Delivery
Number of Requisition Lines
910
2500
Pick Pack
Number of Pick and Req. Lines
Data Entry
Desk Top Delivery
Number of Desktop Deliveries 26

27. Activity Based Cost Analysis
Current
Activity Based Customer A
Activity Based Customer B
Storage
$1,550.50
$3,101.00
Requisition Handling
$2,114.84
$4,589.90
Basic Warehouse Stock Delivery
$891.80
$2,450.00
Pick Pack
$955.50
$2,625.00
Data Entry
$718.90
$1,975.00
Desk Top Delivery
$0.00
$764.66
Subtotal ABC
$10,250
$6,231.54
$15,505.56
Freight
$3,500
$2,250
$7,500
Cost of Capital
$2,350
$1,950
$6,500
Total
$16,100
$10,432
$29,506
Note: * Activity Based Customer = Customer Cost x Overhead Allocation
Cost of Capital = 13% x Customer’s Average monthly inventory balance
Current Subtotal ABC = 20.5% x Product Cost
Current Freight = 7% x Product Cost Current Cost of Capital = 4.7% x Product Cost

28. Activity Based Cost Analysis
Current
Customer A
Customer B
Sales
$79,320
Product Cost
$50,000
Distribution/Services (32.2%)
$16,100
----
ABC
$10,432
$29,506
Return on Sales ($)
$13,220
$18,888
($186)
Return on Sales (%)
16.7%
23.8%
-0.23%

29. Question 3:
3) What inference do you draw about the profitability of these two customers?

30. Return on sales to
customer A equals 18,888$ = 23,8 %
Customer B equals $ = -0,23%
For the Allied Office Products it is much more profitable to work with customer A, because with the B customer, they are actually realizing loss
This couldn’t been seen through the current accounting system
When ABC was implemented, the costs for every customer can be known separately

31. Question 4:
4) Should TFC implement the SBP pricing system?

32. Service based pricing should be implemented
Every customer can be charged exactly for what they purchase
Customers will be more satisfied with the service
The company will know exactly what are the costs for every customer

33. Question 5:
5) What managerial advice do you have for Allied about the Total Forms Control (TFC) business? How does Exhibit 6 relate to this question?

34. Company Optimization
Centralize data entry into single location
Build a staffing model designed to reduce headcount, possibly by consolidating warehouses
Modify compensation plan to help encourage sales behavior focused on growing customer revenue and profitability
Implement Customer Profiling Program
Initiate Just In Time Inventory (JIT) System with Allied (for 179 customers that represent 72% of sales)
Incorporate purchase history into requisition process and establish autofill order process
Introduce customer needs assessment and cross-sell initiative
Reduce pick-pack orders: work with Allied to reconfigure cartons to meet top 40 accounts’ buying patterns

35. Thank You
For Your Attention 