Dakota Office Products Case Study
1. Why was Dakota’s existing pricing system inadequate for its current operating environment?
DOP’s has chosen to use a traditional cost pricing system where direct and indirect costs are assigned and allocated to products and services delivered to clients. This system has proven beneficial for companies where production operations are high labor intensive and overhead costs are smaller part of total costs. Nowadays, when automation and technology are ubiquitous overhead costs make up much higher percentage and are often lumped together with direct labor costs. An ABC approach would be much more appropriate for the DOP’s business as it will calculate costs of products and services based on the activities involved and resources absorbed. Furthermore, the DOP’s pricing system is described as ‘independent of the specific level of service developed’ which automatically signals for the cross-subsidies phenomenon where some services’ costs are understated and others overstated. This happens in companies where overhead costs are too complex for the simple overhead allocation system used as it is at DOP. 2. Develop an activity based costing system for Dakota Office Products based on Year 2000 data. Calculate the activity cost-driver rate for each Dakota Office Product activity in 2000. # | Activity | Assigned cost centers | $ | Cost driver | Activity quantity | Cost driver rate ($/quantity) | Unit of service | 1 | Process cartons in and out of the facility | 90% of Warehouse personnel expense
Cost of items purchased | 37,160,000 | cartons | 80,000 | 464.5 | $/per carton | 2 | The new desk top delivery service: | | | | | | | | 2a New desk top cartons deliveries | 10% of Warehouse personnel
Delivery truck expenses | 440,000 | cartons | 5,000 | 88 | $/per carton | | 2b New desk top deliveries | 10% of Warehouse personnel
Delivery truck expenses | 440,000 | deliveries | 2,000 | 220 | $/per
DOP’s has chosen to use a traditional cost pricing system where direct and indirect costs are assigned and allocated to products and services delivered to clients. This system has proven beneficial for companies where production operations are high labor intensive and overhead costs are smaller part of total costs. Nowadays, when automation and technology are ubiquitous overhead costs make up much higher percentage and are often lumped together with direct labor costs. An ABC approach would be much more appropriate for the DOP’s business as it will calculate costs of products and services based on the activities involved and resources absorbed. Furthermore, the DOP’s pricing system is described as ‘independent of the specific level of service developed’ which automatically signals for the cross-subsidies phenomenon where some services’ costs are understated and others overstated. This happens in companies where overhead costs are too complex for the simple overhead allocation system used as it is at DOP. 2. Develop an activity based costing system for Dakota Office Products based on Year 2000 data. Calculate the activity cost-driver rate for each Dakota Office Product activity in 2000. # | Activity | Assigned cost centers | $ | Cost driver | Activity quantity | Cost driver rate ($/quantity) | Unit of service | 1 | Process cartons in and out of the facility | 90% of Warehouse personnel expense
Cost of items purchased | 37,160,000 | cartons | 80,000 | 464.5 | $/per carton | 2 | The new desk top delivery service: | | | | | | | | 2a New desk top cartons deliveries | 10% of Warehouse personnel
Delivery truck expenses | 440,000 | cartons | 5,000 | 88 | $/per carton | | 2b New desk top deliveries | 10% of Warehouse personnel
Delivery truck expenses | 440,000 | deliveries | 2,000 | 220 | $/per