2019-02-27T205255.158

You are on page 1of 3

Tots R Us

1.Compute the cost of a single preschool class and a single birthday party using the
current cost system.
Preschool Class Costs Birthday Party Costs
Building Related 216,000 0
Salaries 90,000=50,000+20,000*2 10,000=5,000*2
18000 3000
Advertising 0 0
Total $324,000 $13,000
Unit 1200 class meetings 150 parties
Unit Cost $270 $86.67

2. Would you recommend that TRU continue to allocate the building-related costs
only to the preschool program? What alternative allocation method would you
suggest? Justify your answer. Ignore consideration of excess capacity discussed in
question 3 below for this answer. Please discuss any additional information that you
feel is needed.
No, I would not recommend TRU continue to allocate the building-related costs only
to the preschool program because it is not an accurate way to compute the actual costs
for Birthday Party product. I would suggest TRU to use the activity based costing
allocation method. To use this method, I would need additional information on: exact
labor hours spent both on preschool class and birthday party, and the exact number of
children who are attending preschool program and the birthday party.

4. Do you agree with TRU’s allocation method for salaries, supplies, and food? Why
or why not? Be specific about any alternative allocation methods that you would
consider.
I do agree the TRU’s current allocation method for salaries, supplies, and food. They
are currently utilizing a Direct Cost Allocation Method that is based on the percentage
of time that each employee is associated with a particular service that accurately
reflects the actual cost of labor for the associated service.

5. Do you agree with TRU’s decision not to allocate the cost of advertising? Why or
why not? Be specific about any alternative allocation methods that you would
consider?
I do not agree with TRU’s decision to not allocate the cost of advertising either
business segment since it prevents the true cost of either product from being realized.
Furthermore, failing to allocate the advertising expenses can create inefficiencies
waste, and possibly even fraud. We believe that, just like the building-related costs
discussed earlier, TRU should begin allocating the advertising costs utilizing the Step-
Down allocation method. Applying the Step-Down method for the most recent year,
(FISCAL YEAR 2002) which had a total of 1350 services provided during the most
recent year (1200 classes and 150 birthday parties), the total advertising costs would
be allocated at a rate of 92% to the preschool segment and 8% to the birthday party
segment.

6. Compute the cost per class meeting and per birthday party under the assumptions
that you have made.
Revised Cost per Preschool Class & Birthday Party for FISCAL YEAR 2002, 1200 &
150 respectively.
Revised Cost per Preschool Class & Birthday Party w/ Year Round Classes, 1560 &
150 respectively.

7. How could TRU use the information from the revised cost information to enhance
profitability?
We believe that TRU can use the information obtained from the revised cost
information to enhance their business profitability in a variety of way. First, we
believe that a thorough review of the revised cost information and performing a cost
analysis TRU could see the increased profitability that would result from them
offering preschool classes on a year round basis. Second, they could adjust their
pricing to more accurately account for the cost of each service, which, for birthday
parties, is actually much higher than they initially believed. By accounting for the
actual costs associated with each service and adjusting their prices accordingly, TRU
will be able to make better decisions about the long-term future, and thus success, of
the business. Third, TRU can utilize the revised cost information to develop more
accurate and dependable budgets for future years and analysis the costs and benefits
of future expenditures, whether it be advertising, supplies and food, or employee-
related decisions.

Dakota Office Products

1.Identify expenses on the income statement that are sales fulfillment expenses and
divide them into cost pools.
1. Warehouse Expenses: Warehouse personnel expenses, warehouse expenses
(excluding personnel) Order entry expenses
2. Delivery Expenses: Freight, delivery truck expenses

2. Find the rate for each cost pool.

Activity No. of operations Cost Cost per Driver


Warehouse handing and space 80,000 $4,160,000 $52/carton
Desktop Delivery 2000 $800,000 $220/delivery
Manual Order Entry 16000 $160,000 $10/order
Individual lines for manual 150000 $600,000 $4/line
order
EDI orders 8000 $40,000 $5/order

3.Given the use of each resource in the sales fulfillment cycle, determine the
profitability of each customer.
Profitability of each customer is determined in the table below:

Customer A Customer B
Sales $103,000 $104,000
COGS $85,000 $85,000
Gross Margin $18,000 $19,000
Customer A Customer B
Cartons shipped by 200 150 $1200 $900
commercial freight
Deliveries by Dakota 25 $5,500
personnel
Manual orders 6 100 $60 $100
Line Items 60 180 $240 $720
Internet orders 6 $30
Cartons through the 200 200 $10,400 $10,400
facility

Other costs
General and selling, allocated sales $4,847 $4,894
Interest on accounts receivables
Simple interest rate = 10% on avg
Account receivable balance
Customer A= 10%*9000
Customer B= 10%*30000 $900 $3,000
Profit $323 -$7,414

4.What should Dakota do based on the information you determined?


Profitability must be improved at DOP. Profitability can be ensured and unexpected
losses can be avoided through use of activity-based costing and pricing at the
company.
The current cost allocation system at DOP provides inadequate information to manage
the business for a profit. For the services provided, DOP prices are too low to be
profitable. The example of two “similar” customers with very dissimilar activities
illustrated the blind spots with the current cost system at DOP. The proposed activity-
based costing system would provide information necessary for improved pricing.
Customers should understand the cost drivers for DOP’s business. Education will aid
customers’ deliberate choice of services with the highest value to them.
Extension of the analysis of relative profitability to the entire customer base has value
as a test of overall profitability for DOP. Use of the method outlined here will also
provide clarity and confidence surrounding individual customer profitability.
But, new pricing would be higher and could lower demand. Major customers will
likely expect advantaged pricing or service concessions. Price increases should be
fine-tuned to maximize demand and profit though estimates and experiential
determination of the demand vs. price effect.
Finally, past performance has value to predict future cost drivers but should be
revisited annually or more frequently if needed. This is because major shifts in the
balance of services provided by DOP could significantly change the cost drivers.

You might also like