Office Dakota Products Case Analysis

Topics: Costs, Management accounting, Cost accounting Pages: 5 (4121 words) Published: January 21, 2012
Office Dakota Products Case Analysis Course: BUSA 5061 Managerial Accounting Students Name: Teresa Willette Professors Name: Dr. Conner/Dr. Pollard Date 3/20/2011 Executive Summary The following analysis is written for Dakota Office Products to evaluate current business operations and recommend future actions necessary to ensure company success. In the analysis of the company we will identify inefficient business practices that have led to the companies first profit loss in its history. We will evaluate the companys current pricing structure, ordering methods, shipping and delivery process, and deficiencies in cash flows. For Dakota Office Products (DOP), its existing costing system was inadequate because it is incapable of accounting for even all of the known costs such as the desktop delivery service as well as hidden costs such as the ten percent DOP paid to maintain its working capital line of credit for accounts receivable. Using the Activity Based Costing(ABC) methodology can be utilized to also improve processes and identify opportunities to improve business effectiveness and efficiency by determining the true or real costs of a given product or service. ABC principles are used to focus management's attention on the total cost to produce a product or service, and as a basis for full cost recovery of a production or service process. Background Information The company under the study, Dakota Office Products, is an established and reputed player under this segment. They were regional distributors for office supplies and the major clientele served by the company included institutional and commercial clients. It dealt with all kind of office supplies starting from all kinds of writing equipment to papers and other office supplies. The company has been able to carve a good name for itself in the industry. The company had also arranged for several distribution centers where the shipments were required to be unloaded and packed into cartons meant to be delivered to the respective customers. In order to increase the utility for its customers, the company had introduced the desk top option for its valued customers. Under this option, the company will use its own fleet to directly deliver the goods at the customers premises. The company charged a small additional amount of upto 2% of the marked price for this additional value added service. This decision was made keeping in mind that such a decision could boost the margins of the company. The company had the policy of marking the sales price by 15% over and above the purchase price. This policy was framed to ensure that the overheads and transportation cost of the materials could be made up from the mark up. The company would then add another mark up to ensure coverage of general expenses and contribution of the company. The mark up decision was taken at the beginning of the year based on the projected cost of the different products of the company. Key Issues The management is faced with major pricing and costing issue for its products. The company has been using the traditional costing method to compute the cost of the product provided to the clients. The company then adds a mark up as per its policy to come up at the selling price of the product. As a result of not following the Activity Based Costing, the company has not been able to cost the products realistically. This has lead to mispricing of the products and resultant overall loss to the company. The fact that an increase in sales has not lead to an increased profits, instead, it has resulted in increased losses has exposed the limitations of the cost accounting system of the company. The company has not been able to increase its profits. This has led the management to believe that the existing cost accounting system has some serious flaws which needs to be rectified on an immediate basis so as to avoid making bad decision leading to losses to the company. The company should now be contemplating the implementation of...
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