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Steadman 135
IMPLEMENTING THE ACTIVITY BASE COSTING
SYSTEM: A CASE STUDY ON DAKOTA OFFICE
SUPPLY
By Betty W. Steadman
Overview Situational Analysis
Steadman, B.W. - Case Study 4: Implementing the Activity Base Costing System: A Case Study on Dakota Office Supply
136 Business Intelligence Journal July
able to identify where the cost would be divided by the number of cost-
inefficiencies were in its operations. drivers such as order set-up, order entry,
order validation, receiving, handling,
Activity Based Costing packaging, loading, and delivery and the
result would be the cost per occurrence of
Traditional product costing such as the cost-driver rate: $550k. This figure is
DOP employs was designed for an then divided by the total number of
industry comprised of companies having instances these actions occurred which, as
one-type (homogenous) of product, large reported by DOP was 80k during 2000 and
direct (fixed) costs, very few data so the cost-driver the year would be $6.87
collection techniques and fewer data per activity on average. This figure would
analysis tools, and low below line costs. be used to identify unprofitable accounts
By contrast, contemporary industry such as the customer A and B mentioned
exhibits a highly diversified in the case where customer A and B both
product/service mix as evidenced by generated approximately $100k in annual
DOP’s employment of both commercial revenues and based on customer A’s
delivery methods and its new customized 21.2% markup this would mean that
individually oriented delivery model $78,800 represented the COGS (cost of
accompanied by high overhead costs as goods sold) while the cost-driver would
compared to fixed labor costs, a mass indicate that $10,992 went towards the
amount of data with countless ways to associated activity costs which would
analyze it, and considerable non-product, mean that customer A’s profitability is
indirect, or hidden costs affecting overall $10,208. By contrast, customer B’s
pricing, costs and expenditures. profitability is lower. Based on the same
ABC is a system of accounting based assumptions customer B’s COGS is
on the allocation of resources and $77,600 while the cost-driver would be
accounting for the value of those resources factored with an extra activity per carton
in relation to a specific task or activity. In and thus would be $12,366 plus the $3,000
this sense, labor and direct material costs to carry its accounts receivable balance
lose the prominence that they are given in resulting in a profitability of $7,034.
traditional costing systems and are Because of the additional activities
accounted for as any other resource is associated with customer B and the hidden
accounted for. Activities such as sales, cost of carrying its accounts receivable
support, or other business processes are balance, customer B is less profitable with
largely excluded. This is not the case in the same overall revenues as customer A.
ABC because all the various functions, While it is difficult to identify limitations
activities, and support processes of a in this ABC methodology with respect to
company are broken down into pools of these particular customers it could be
resources with a particular value attached argued that the goodwill created by the
to them. For example, developing a cost- additional services for customer B will
driver rate for DOP would involve basing result in longer service and greater orders
an estimate on an approximate 80% in the future.
capacity rate to employees. For example, a Recommended Application at DOP
cost-driver for DOP related to warehouse
operations is 4,400,000 annually which
Steadman, B.W. - Case Study 4: Implementing the Activity Base Costing System: A Case Study on Dakota Office Supply
2008 Betty W. Steadman 137
Steadman, B.W. - Case Study 4: Implementing the Activity Base Costing System: A Case Study on Dakota Office Supply
138 Business Intelligence Journal July
should the company only cut costs without Products. Harvard Business School, 9-
improving its cost-accounting 102-021.
methodology.
Latshaw, C. A., & Cortese-Danile, T. M.
References (2002). Activity-Based Costing:
Usage and Pitfalls. Review of Business,
Caplan, D., Melumad, N. D., & Ziv, A. 23(1), 30+.
(2005). Activity-Based Costing and
Cost Interdependencies among Products: Maiga, A. S., & Jacobs, F. A. (2003).
The Denim Finishing Company. Issues Balanced Scorecard, Activity-Based
in Accounting Education, 20(1), 51+. Costing and Company Performance: An
Empirical Analysis. Journal of
Kaplan, R. (2003). Dakota Office Managerial Issues, 15(3), 283+.
Steadman, B.W. - Case Study 4: Implementing the Activity Base Costing System: A Case Study on Dakota Office Supply