Cost Management Midwest Office

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JASON ZHANG GRISSOM ZENG HARRY LAM RICKY LO

1007609874 1155024921 1008600851 1155024902

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Presentation Structure

• Part I Introduction - Harry

• Part II ABC Model Calculation - Jason
• Part III Customer Managing - Ricky • Part IV Improvement & Strategy - Grissom 2

Part I. Introduction

• Part I Introduction

3

Part I. Introduction

Who we are?
• Regional distributor of office supplies • Writing implement (such as pens, pencils and markers)

• Specialty paper for printing machine
4

Part I. Introduction

How we operate?
• Collaborate with different suppliers • Self own distribution center( warehouse + data processing system)

5

Part I. Introduction

How we operate?
• Unload  Cartons  Warehouse

• Receive order  Accumulate the cartons Shipment
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Part I. Introduction

How do we price our product?
• Warehousing, order processing and transportation fee  16% marking up • General selling, administrative expense ,allowance  6% marking up • Desktop delivery  additional premium (up to 5% markup)

7

Part I. Introduction
Category of Delivery Costing
• Commercial Truckers • Desktop Delivery
Commercial Truck
Typical option
Non- Direct Delivery N/A

vs

Desktop Delivery
New option
Direct Delivery Extra Truck and Drivers

8

Part I. Introduction
Category of Order Entry Costing
• Manual Entry • Electronic Data Interchange (EDI) + Internet website Manual Entry Orders Arrival Time of Validity Check Manual Different vs EDI Automatic Same

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Part I. Introduction
What problems we are facing?
• Financial result in 2003

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Part I. Introduction What problems we are facing?
• Sales increase Loss in record • Costs Raising • Ways of regaining the profitability

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Part I. Introduction

Research Direction

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Part I. Introduction

Five representative orders

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Part I. Introduction
Cost drivers
Activity Warehouse Space People to move carton Commercial Freight Desktop Deliveries Order Entry General and Selling Cost Driver Number of Carton Number of Carton Volume Number of Hour Number of Hour Number of Carton

14

Part I. Introduction
Research Direction
• 1 ABC System  Profit and Loss  Impact of the Interest • 2 Client Management: MSDA  Classification of Clients  BSC • 3 ABC vs Traditional Cost System  Process Improvement

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• Part II ABC Model Calculation

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Sales
COGS Gross margin Personnel expense (warehouse & truck drivers) Warehouse management(excl. warehouse workers) Commercial freight Own delivery truck Order entry (salary for operators) General and selling expense Interest expense

$42,700,000
(35,000,000) 7,700,000 (2,570,000) (2,000,000) (450,000) (200,000) (840,000) (1,600,000) (120,000)

122.0%
100.0% 22.0% 0.0% -7.3% -5.7% -1.3% -0.6% -2.4% -4.6% -0.3%

Net income before taxes

(80,000)

-0.2%

External version of financial statement can’t reflect each customer profitability

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The allocation of operation costs (exclude COGS)
120,000 1,600,000 840,000 2,320,000

Warehouse personnel

Warehouse management(excl. warehouse workers) Commercial freight

Own delivery truck

2,000,000

200,000 450,000

Order entry (salary for operators) General and selling expense 18

Part II- Calculate the cost rate of each activity

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Warehouse personnel

1) Warehousing process cost rate
120,000 Warehouse management(excl. warehouse workers) Commercial freight 2,320,000 Own delivery truck

1,600,000 840,000

2,000,000 200,000 450,000

Order entry (salary for operators)
General and selling expense Interest expense 20

1) Warehousing process cost rate
Both warehouse storage and relevant personnel salary included: • Warehousing personnel: $2,320,000; warehouse expense: $2,000,000, total = $4,320,000; • Processed cartons per year: 80,000 units • The carton processing cost = 4,320k/80k = $54/carton

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2) Cost rate for commercial delivery
Warehouse...
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