Essay About Product Cost And Business Forms Inventory Management Services

Allied office Products
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Allied Office ProductsGarini Retno Utami – 359250[pic 1]Case AnalysisIn 1992, Allied Office Products was a corporation with annual sales of $900 million in business forms and specialty paper products such as writing paper, envelopes, note cards, and greeting card. Then in 1988 the company had expanded into business forms inventory management services. It also started a program called “Total Forms Control” (TFC) which gave sales of $60 million by 1992. Under TFC, the business forms inventory management services include warehouse, inventory financing, forms usage reporting, inventory control, and distribution (pick pack and desk top delivery). The clients who participated was charged on a product cost plus 32.2% of product cost to cover the cost of warehousing, distribution, cost of capital for inventory, and freight expenses. The sales force marked up the cost of product and services by 20%. In October 1992, TFC profitability suffered that the General Manager, John Malone, began to realize; if two clients buy the same amount of product from the company, one keeps a lot of inventory at company’s distribution center and other hardly bothers them at all, they both should pay the same service fees. After interviewing and observing from several key staffs, Director of Operations Tim Cunningham and John identified six primary value-added activities such as storage, requisition handling, basic warehouse stock selection, “pick-pack” activitiy, data entry, and desk top delivery. ProblemsAfter analyzing the case, the cost driver of each activity can be determined based on the historical information and current trends. First, the cost driver of storage will be number of cartons (350,000 cartons). Second, the cost driver of requisition handling is number of requisitions (310,000 requisitions). Third, the cost driver of basic warehouse stock is number of requisition lines (310,000 requsitions * 2,5 lines = 775,000 requisition lines). Forth, the cost driver of pick-pack will be the number of pick and requisition lines (775,000 requsition lines * 90% = 697,500 units). Fifth, the data entry will also be the number of requisition lines (775,000). Sixth, the cost driver of desk top delivery will be the number of desktop deliveries which is 8500 desktop deliveries. After determining all cost drivers, ABC-bsed services costs for the TFC business then can be calculated as follows:Cost Pools (activity)Value%Storage expense$ 1,550,00027.2 % Requisition handling expense$ 1,810,00031.6 %Warehouse activitiy:      Basic warehouse stock selection (40%)$ 761,00013.3 %      Pick-pack activity (42%)$ 734,00012.9 %      Desk top delivery (14%)$ 250,000$ 1,745,0004.4 %Data processing expense $    612,00010.7%Total$ 5,708,000100%ActivityTotal CostTotal Cost Driver UnitsOverhead Allocation (Total cost/toal cost driver unitsStorage$ 1,550,000350,000$ 4.43Requisition handling $ 1,810,000310,000$ 5.81Basic warehouse stock delivery$    761,000775,000$ 0.98Pick-pack $    734,000667,500$ 1.05Data entry      $    612,000775,000$ 0.79Desk top delivery$    250,000    8,500$ 29.41    Total$ 5,708,000With the new costing system, which is ABC system in the TFC business, the distribution services costs for Customer A and Customer B then can be calculated. First of all, the cost driver need to be determined for each type of customer. ActivityCost DriverCustomer ACustomer BStorageNumber of cartons350700Requisition HandlingNumber of requisitions364790Basic warehouse stock deliveryNumber of requistion lines9102500Pick packNumber of pick and requisition lines9102500Data entryNumber of requisition lines9102500Desk top deliveryNumber of desktop deliveries026Activity Based Cost Analysis