Questions: Dakota Office Products
Why was Dakota’s existing pricing system inadequate for its current operating environment? Dakota’s existing pricing system was inadequate for its current operating environment because the pricing was based on traditional allocation of overheads. The result of which were that the actual costs incurred for fulfilling the orders of customers were not ascertained. There were two effects of this method. First, the overall prices of all the products increased. Second, those products that were more costly to produce were priced lower than their actual cost price. 2.
Provide a brief analysis of the attached (page 2 of this document) activity-based costing system. Do you agree with the activities and/or cost drivers identified for each activity? Why or why not? The activity based costing divides the operating costs into five different areas and allocates the overheads based on the actual costs incurred by each activity. In this case the operating costs are divided into freight, warehouse rent & depreciation, warehouse distribution, delivery truck expenses, and order entry expenses. The freight has been allocated on the basis of cartons shipped, the warehouse rent & depreciation has been allocated on the basis of the number of cartons processed, the warehouse distribution personnel cost 90% on the basis of cartons processed and 10% on the basis of delivery to desktop, the delivery truck expenses have been allocated on the basis of deliveries made to desktop, and the order entry expenses 20% on the basis of processing manual custom order, 75% on the basis of items ordered manually and 5% on the basis of processes EDI orders. From this the per item cost is calculated. I agree with the allocation of shipping carton cost allocation, warehouse rent & depreciation allocation, and order entry expense allocation. The warehouse distribution personnel allocation may not be correct. 10 % of the personnel are used for delivery trucks when...
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