The profitability of Colorscope, Inc, a company dealing in graphic arts industry, is affected by rapid development of technologies such as desktop publishing and World Wide Web and the consolidation of several major players within the industry. Despite charging more or less the same per-page price for different customers, Colorscope's operations do not appear to be profitable.
The data given in the case has been analyzed as given below:
1. Different jobs undertaken by Colorscope place varying demand on company's resources. Company seems to have not charged its customers depending upon the demand on resources. For example : Job no. # 61001, 61101, 61401, 61701 and 61902 require different amount of time but they were not charged in the same proportion.
Table 1 Revenue Vs time
Therefore to ascertain the profitability of each job, two stage job costing system (ABC) is used.
1st stage: Resource costs are allocated to cost pool using appropriate resource drivers. Wages and depreciation cost are allocated on actual basis. Rent has been allocated on the basis of floor space (in sq. ft.) to various cost pools including idle space separately. Direct Wage Cost is used as resource driver for allocation of other overhead costs. ii.
2nd stage: The costs in various cost pools have been allocated to various jobs on the basis of time spent on the job i.e. Labor hours.
In the above scheme, costs associated with idle time indicate under-utilization of capacity. The inefficiency of the Colorscope in the form of under-utilization of capacity can not be ethically charged to customers.
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