1. Context and Problem Definition
Blue Ridge Manufacturing produces and sells towels for the U.S. ‘sports towel’ market. A ‘sports towel’ is a towel that has the promotion of an event or a logo printed on it. Their most popular use is distribution in connection with major sporting events such as the Super Bowl or the U.S. Open. The firm designs, knits, prints and embroiders towels in three sizes: regular (18”x18”), hand (12”x20”) and mid-range (15”x24”). Occasionally, customers order towels in another size, referred to as ‘special’. Blue Ridge Manufacturing serves three types of customers: large (national chains), small (single store operations) and medium sized customers (small chains, large single stores, licensing agents). Recently Blue Ridge introduced an activity based costing (ABC) system to determine product costs. The system is fairly complicated and the management is confident of the accuracy of the manufacturing cost figures for each product line. The question of Blue Ridges’ management is to advise them on the potential of using strategic cost analysis in assessing the profitability of their customers’ accounts. Potential behavioural implications on the marketing and selling personnel arising from using ABC in costing distribution, marketing and customer support functions should also be discussed.
2. Approach & assumptions
The assignment of the manufacturing costs (manufacturing towels, customising and other factory overhead) towards product groups will be taken as a given and will not be re-allocated because the company has full confidence in the accuracy of these figures. However, in order to reveal the true profitability of the three customer accounts we will examine & re-allocate the costs regarding selling and administrative expenses towards the customer groups. We will use for this the ABC approach. The steps to take in ABC analysis are the following ones [Slagmulder, 2010]: 1. Identify the key activities that take place in the sales and administrative OH 2. Determine the resources they consume 3. Identify one appropriate cost driver per activity cost pool 4. Calculate the cost per unit cost driver 5. Calculate the cost for each customer group
The results and interpretation of them will be dealt with in section 4 of the paper.
Based on Blue Ridge Manufacturing’s income statement we could state there are 3 types of overhead: A - other factory Overhead ($17.000) B - General Administration ($170.000) C - Selling expenses ($155.000) However for those key activities we are interested in (sales and admin OH), total specified costs are only $285.900. We assume “A” (factory) OH is not part of the sales and admin OH (and is included in the ABC product cost we use in table 2) and the “unused capacity” cost of $39.100 (=170.000 + 155.000 – 285.900) cannot be used for sales and admin activities (eg. Maybe it is used for other activities). So in fact practical capacity cost is $285.900 for sales and admin OH (in our ABC analysis).
Step 1: Identify the key activities regarding selling & administration that take place in the organization
Those are listed in table 4A of the case and can be found in Table2 of this paper
Step 2: Identify the resources they consume
In this step, we will first allocate the cost of the indirect resources of administration and selling expenses towards the defined cost pools (shipping, sales, marketing and other). This information can be found in Table1.
Administration Selling TOTAL
$ $ $
SHIPPING SALES MARKETING OTHER 17.000 $ 37.400 $ 20.400 $ 56.100 15.500 $ 117.800 $ 9.300 $ 12.400 32.500 $ 155.200 $ 29.700 $ 68.500 Table 1: Stage 1 Allocation (based on Table4A)
TOTAL $ 130.900 $ 155.000
From the defined resource pools onwards, we will assign to each activity the appropriate cost based on the information given in Table2
ACTIVITIES Entering purchase orders Commission Shipping activities Invoicing Cost to...