Case: Dakota Office Products
1. Background Information
Dakota Office Products (DOP) is a regional office supply company with a strong reputation for customer service and quality supplies. Additionally, DOP is unafraid to adopt new services such as its desk top deliver option which delivers smaller orders directly to individual sites as well as its traditional commercial freight delivery. DOP has also introduced and Electronic Data Interchange (EDI) in order to ease data and payment transfer from and to customers as well as building a customer website that acts as an order and account interface for its customers.
2.1 People/Key Players
John MaloneGeneral Manager
Tim CunninghamDirector of Operations
Wilbur SmithSite Manager
Hazel NutleyData Entry Operator
2.2 Chronology of Key Relevant Events
John Malone, General Manager for Dakota Office Products was concerned about the financial results for 2000 since the company just suffered the first loss in company history. Recently, DOP has attracted new business by offering a desk top delivery option which delivers smaller orders directly to customer sites. Dakota charges a small mark up of 2% for this service. DOP has historically priced its products by using a traditional method of cost accounting by marking up purchased products by 15% to cover warehousing, freight, and distribution and then adding another markup to cover general and selling expense plus an allowance for profit. Dakota has also introduced electronic data exchange (EDI) and a new internet site which allowed customer orders to be placed so that clerks would not have to enter customer and order data manually. Several customers have switched to this method for the convenience but Dakota’s costs have continued to rise. John sent Melissa and Tim into the field to get a clearer picture of the company’s activities and costs. Melissa and Tim met with Wilbur and Hazel at a local DOP site and gathered information concerning all of Dakota’s operating activities and, time to perform activities and costs associated with those activities.
2.3 Key Facts
Dakota’s net income before taxes for 2000 was ($470,000). We were also given the facts that Dakota processed 80,000 cartons (75,000 by commercial freight and 5,000 by desk top delivery), 2,000 desk top deliveries during the year, processed 16,000 manual orders, and validated 8,000 EDI orders. The 16,000 manual orders contained nearly 10 items per orders, or 150,000 order lines. 90% of the workers in the distribution center processed cartons while the remaining 10% were assigned to the desk top delivery service. The data entry team worked 10,000 hours in 2000 with 9,500 hours being devoted to setting up manual orders and entering individual order lines in an order. Additionally, we were given a profitability report and services provided comparison on Customer A and Customer B showing comparatively equal dollars of sales, gross margin and profitability between the two customers. 2.4 Concepts
Activity Based Costing (ABC) is an accounting method that allows an organization to determine actual costs associated with each product and/or service produced by the organization without regard to the organizational structure or other function. For Dakota Office Products, its existing traditional costing system is inadequate because it is incapable of accounting for all of the known costs such as the desk top delivery service. ABC is a tool for identifying, describing and assigning costs to an organization’s operation. ABC can also be utilized to identify opportunities to improve business effectiveness and efficiency by determining the true costs of a given product or service.
Dakota Office Products recently introduced a new delivery system and internet option for customer orders. It is assumed that these new systems are...