Managerial Accounting Case Study on

Colorscope , Inc

Group 1
1. Ashutosh kumar(X004-19)
2.Chandan kumar(X005-19)
3.Naresh kumar(X014-19)
4.Prince Kumar(X016-19)
5.Sachin Deo kumar(X021-19)
Index
 Introduction
 Challenges & Problem
 First Stage Cost Allocation
 Second Stage Cost Allocation
 Profitability Analysis
 Customer Profitability Analysis (Whale Curve)
 Cost of Rework due to change in specification by Customer
 Cost of rework due to House error
 Resolutions for Future
Introduction
 Andrew Cha founded Colorscope-a special –effects photography laboratory on
March 1,1978.
 Sales steadily increased to $5 million dollars at 1988.
 Major Clients are Saatchi & Saatchi , Grey Advertising , J Walter Thompson , The
Walt Disney etc.
 Decided against the acquisition by Donnelley.
 Decrease in market price

Price/page of Work ($)

1200 1100

1000 900
750
800 650
600
600

400 500
450 475
400 425
200

0
1991 1992 1993 1994 1995

Colorscope Service Bureau

Introduction
 Stage 1
Overhead Cost assigned to activity Cost Pools

Job Quality
Scanning Assembly Output
Preparation Control

 Stage 2
Overhead Costs are assigned to products

61001 61402 62001

……………….. ………………
Challenges & Problem
 Technical savvy printing companies with bundled pricing as intense
competition.
 Market price reduced to $500-$600/page from $1200/page. Cost pressure
was building up.
 Operational process to be developed by Colorscope to improve productivity
and reduce cost.
 Pricing strategy to be adopted by Colorscope.
 Cost & Accounting control system to be installed by Colorscope.
 First Stage Cost Allocation
• We are considering actual costing instead of normal costing as we do not have
budgeted data.

• Rent is calculated based on ratio distribution of the floor area.

Job preparation
Rent= $(1000/15000)*30000=$2000

• Others is calculated based on labor hour ratio distribution.

Job preparation
Rent=$(160/2440)*20000=$1311.48

Exhibit 11
JOB QUALITY
DESCRIPTION PREPARATION SCANNING ASSEMBLY OUTPUT CONTROL IDLE TOTAL
Wages $8,000 $32,000 $64,000 $10,000 $11,000 $0 $125,000
Depreciation $500 $25,000 $10,000 $14,000 $500 $0 $50,000
Rent $2,000 $2,000 $8,000 $4,000 $1,000 $13,000 $30,000
Others $1,311.48 $5,245.90 $10,491.80 $1,639.34 $1,311.48 $0 $20,000
Activity Cost for product line $11,811.48 $64,245.90 $92,491.80 $29,639.34 $13,811.48 $13,000.00 $225,000.00
Cost Driver Labor hour (from 160 640 1280 200 160 2440
Exhibit 9)
Activity Cost/hr $73.82 $100.38 $72.26 $148.20 $86.32
Floor Space in sq Ft 1000 1000 4000 2000 500 6500 15000
Second Stage Cost Allocation
 We will allocate overhead cost to each jobs with Exhibit 8,9 &12.
 It is observed there is 249 hrs of idle time and $13000 worth idle land.
 Expenses taken from Exhibit 12.
 Overhead Cost
For job # 61001 (Hrs clocked from Exhibit 9)
= 4*$73.82+32*$100.38+42*$72.26+8*$148.20+7*$86.32
= $8332
Similarly overhead cost of each job is calculated.

 Net profit/Loss=Revenue-Material-Overhead loss. (Details in next slide)

Profitability Analysis
Overhead
Job Customer Revenue Materials Gross margin Net Profit loss
Cost
61001 10 $9,600 $5,400.00 $4,200.00 $8,332 ($4,132)
61002 10 $9,600 $3,500.00 $6,100.00 $7,253 ($1,153)
61003 10 $23,000 $4,500.00 $18,500.00 $13,013 $5,487
61101 11 $12,000 $1,800.00 $10,200.00 $5,007 $5,193
61102 11 $11,000 $1,500.00 $9,500.00 $4,863 $4,637
61201 12 $11,000 $1,500.00 $9,500.00 $5,324 $4,176
61202 12 $23,000 $3,300.00 $19,700.00 $9,537 $10,163
61203 12 $22,000 $3,400.00 $18,600.00 $10,184 $8,416
61204 12 $20,000 $3,200.00 $16,800.00 $9,522 $7,278
61301 13 $50,000 $13,000.00 $37,000.00 $39,554 ($2,554)
61401 14 $7,800 $1,800.00 $6,000.00 $5,025 $975
61402 14 $8,000 $3,100.00 $4,900.00 $6,305 ($1,405)
61403 14 $8,000 $3,900.00 $4,100.00 $5,612 ($1,512)
61404 14 $9,000 $2,100.00 $6,900.00 $6,129 $771
61405 14 $9,800 $2,000.00 $7,800.00 $5,842 $1,958
61501 15 $11,000 $2,200.00 $8,800.00 $616 $2,640
61502 15 $11,000 $3,600.00 $7,400.00 $6,983 $417
61601 16 $20,000 $3,300.00 $16,700.00 $9,425 $7,275
61602 16 $2,000 $600.00 $1,400.00 $1,607 ($207)
61603 16 $1,400 $1,000.00 $400.00 $1,827 ($1,427)
61701 17 $8,000 $2,100.00 $5,900.00 $5,973 ($73)
61702 17 $10,000 $2,500.00 $7,500.00 $629 $1,210
61801 17 $4,000 $1,600.00 $2,400.00 $1,753 $647
61901 19 $2,000 $1,700.00 $300.00 $1,751 ($1,451)
61902 19 $12,000 $2,200.00 $9,800.00 $6,336 $3,464
62001 20 $0 $200.00 ($200.00) $553 ($753)
Total $50,040
Idle time: ($21,840)
Rent Unused Floor $13,000
Net profit margin $15,200
Customer Profitability Analysis (Whale
Curve)
Cumulative Profit ($)
Job Cumulative Profit
$80,000
61202 $10,163
61203 $18,579
61501 $26,763 $70,000
61204 $34,041
61601 $41,316
61702 $48,187 $60,000
61003 $53,674
61101 $58,867
$50,000
61102 $63,504
61201 $67,680
61902 $71,144 $40,000
61405 $73,102
61401 $74,077
61404 $74,848 $30,000
61801 $75,495
61502 $75,912
$20,000
61701 $75,839
61602 $75,632
62001 $74,879 $10,000
61002 $73,726
61402 $72,321
61603 $70,894 $0

61901 $69,443
61403 $67,931
61301 $65,377
61001 $61,245
Rework due to Change in Specification by Customer
JOB QUALITY
JOB PREPARATION SCANNING ASSEMBLY OUTPUT CONTROL REWORK TOTAL
61001 0 $1,606.15 $722.59 $592.79 $172.64 $2,700.00 $5,794.17
61002 0 $803.07 $433.56 $592.79 $258.97 $1,100.00 $3,188.39
61301 $147.64 $501.92 $722.59 $296.39 $172.64 $1,000.00 $2,841.18
61502 $73.82 $401.54 $578.07 $148.20 0 $1,500.00 $2,701.63
61801 0 $100.38 $216.78 $148.20 0 $1,000.00 $1,465.36
61901 $73.82 $100.38 $289.04 0 0 $1,000.00 $1,463.24
$17,453.97

TOTAL PRICE
OVERHEAD REWORK REVISED
JOB PRICE/PAGE NO. OF PAGES AFTER
COST COST PRICE/PAGE
REWORK

61001 $600 16 $8,332 $5,794 $14,126 $883

61002 $600 16 $7,253 $3,188 $10,441 $653
61301 $391 128 $39,554 $2,841 $42,395 $331
61502 $688 16 $6,983 $2,702 $9,685 $605
61801 $1,000 4 $1,753 $1,465 $3,218 $805
61901 $500 4 $1,751 $1,463 $3,214 $804

• Rework due to change in specifications by customer has increased the price per page . However
the price per page of Job 61301 has not increased much as price per page was $391 only due to
bulk ordering.
• Total Cost of rework due to change in specification by customer is $17453.97.
Rework of House errors due to initiated Quality Control

JOB QUALITY
JOB PREPARATION SCANNING ASSEMBLY OUTPUT CONTROL REWORK TOTAL
61301 $73.82 $301.15 $289.04 $148.20 $86.32 $1,000.00 $1,898.53
61402 0 $903.46 $1,156.15 $296.39 $172.64 $1,000.00 $3,528.64
61403 0 $1,003.84 $1,011.63 $296.39 $86.32 $1,000.00 $3,398.18
61603 $73.82 $301.15 $216.78 $148.20 $0 $500.00 $1,239.95
$10,065.30

OVERHEAD TOTAL PRICE REVISED

JOB PRICE/PAGE NO. OF PAGES REWORK COST
COST AFTER REWORK PRICE/PAGE

61301 $391 128 $39,554 $1,899 $41,453 $324

61402 $500 16 $4,900 $3,529 $8,429 $527
61403 $500 16 $5,612 $3,398 $9,010 $563
61603 $350 4 $1,827 $1,240 $3,067 $767

• Rework due to error in house has increased the price per page . However the price per page of
Job 61301 has not increased much as price per page was $391 only due to bulk ordering. But
in this case error was done by House and rectification was done by customer also.
• Total Cost of rework due to correction of House error is $10,065.30.
Resolutions for future
 Customer initiated rework should be priced.
 Production sequence should be restructured as it cost complete
job process in case of rework
The process should be rectified as
Job preparation Scanning QC Assembly Output QC
 Major cost driver is labour hour as total cost exceeds in comparison
to other cost driver
Idle labour hours should be reduced from 249 hrs with utilization of
idle space.
 Technology development will be helpful in sustainability of
Colorscope and taking of bulk ordering to reduce marginal cost.