Dell 1

Dell, Inc.

By: Tara Marlow

BUS 640: Managerial Accounting

Professor Oscar Lewis

April 11, 2011

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Assignment 1 – Week 1

What is Dell’s strategy for success in the marketplace? Does the company rely primarily on a
customer intimacy, operational excellence, or product leadership customer value proposition?
What evidence supports your conclusion?

Dell’s strategy for success in the marketplace is a combination of their direct customer

model and emphasis on standards-based technologies. Dell relies primarily on customer intimacy

to ensure marketplace success. Dell has the following key tenets at the forefront of their business

strategy (Dell 10-K, March 2005):

1. A direct relationship is the most efficient path to the customer – Dell removes the third
party by allowing customers direct access.

2. Customers can purchase custom-built products and custom-tailored services – This

provides the consumer with what they desire and offers a quicker delivery/distribution
than others within the same industry.

3. Dell is the low-cost leader – Dell has a highly efficient supply chain that allows them to
maintain the lowest cost structure as well as directly provide their customers with low
prices. Lower prices to consumers, extends superior customer value

4. Dell provides a single point of accountability for its customers – There is no need for
third party consultants to provide customer service; Dell handles all service calls
internally.

5. Non-proprietary standards-based technologies deliver the best value to customers – Dell

can be confident in knowing they provide their customers with the best due to internal as
well as external extensive research and development.

What business risks does Dell face that may threaten its ability to satisfy stockholder
expectations? What are some examples of control activities that the company could use to
reduce these risks? (Hint: Focus on pages 7-10 of the 10-K.)
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Dell may face several different business risks, which can threaten satisfying stockholder

expectations. Dell’s net revenue could deteriorate due to U.S. and global macroeconomic trends

(p.7). The industry is very competitive and if Dell’s competitors decide to price-match or offer

the same product for less, this will cause a loss of revenue, market share, and profitability. Dell’s

net revenue is dependent upon international sales; if the local economic and labor conditions take

a turn for the worse globally, the expectation of the stockholder will begin to dissipate. If the

profit margin of the product, customer, and geographic culture is substantially different, the

expectation begins to diminish.

• How as the Sarbanes-Oxley Act of 2002 explicitly affected the disclosures contained in
Dell’s 10-K report? (Hint: Focus on pages 34-35, 59, and 76-78.)

Dell’s 10-K report clearly outlines all necessary reporting stages according to the Sarbanes-

Oxley Act of 2002. There are financial statements and all deficiencies are clearly defined. If

there was a need for change, Dell ensures to notate when, where, why, and how, the transition

will take place as well as specify the impact it will have on its stockholders and consumers.

• Is Dell a merchandiser or a manufacturer? What information contained in the 10-K

supports your answer?

Dell is a merchandiser because they focus on producing the best product to the merchant’s

satisfaction. Dell utilizes several suppliers to manufacture their products. According to Dell’s 10-

K, they control all aspects of research, development, production and release, which means there

is no need for an outside manufacturer of merchandiser.

• What are some examples of direct and indirect inventoriable costs for Dell? Why has
Dell’s gross margin (in dollars) steadily increased from 2003 to 2005, yet the gross
margin as a percentage of net revenue only increased slightly?
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Direct inventoriable costs for Dell are all costs associated with making their products; such

as, monitors, laptops, power cords, printers, etc. Indirect inventoriable costs for Dell are all costs

associated with organization’s operation; such as, tech support, staff, extended warranties,

investments, stock, etc. Dell’s gross margin steadily increased because of maintaining balance

between direct & indirect cost. Although, the gross margin as a percentage of net revenue only

increased slightly, there was an increase. Over the period of three years, an indirect cost may

have increased causing the direct costs to decrease and effect the bottom line.

• What is the inventory balance on Dell’s January 28, 2005 balance sheet? Why is the
inventory balance so small compared to the other current asset balances? What
competitive advantage does Dell derive from its low inventory levels? Page 27 of Dell’s
10-K reports a figure called the crash conversion cycle. The cash conversion cycle for
Dell has consistently been negative. Is this a good sign for Dell or a bad sign? Why?

The inventory balance on Dell’s January 28, 2005 balance sheet is $459. The inventory

balance is smaller compared to the other current asset balances because it is based on the demand

for that particular period. Dell has a competitive advantage with low inventory because they are

able to produce a custom-built product for the customer and ship within 3-5 days. Its is not good

that Dell has a negative Cash Conversion Cycle consistently. Although it is low, the negative

numbers reflect there is a disconnect between the direct labor manufacturing overhead in

creating the final product.

• Describe some of the various types of operating expenses incurred by Dell. Why are
these expenses treated as period costs?

Dell incurred the following as various types of operating costs selling, general, and

administrative as well as research, development, and engineering. These costs are all associated

with the perspective period on the income statement. As these operating costs are accrued or

incurred, they are allocated for its designated period and labeled as period costs.
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• List four different cost objects for Dell. For each cost object, mention one example of a
direct cost and an indirect cost.

The following four cost objects for Dell are as follows:

1. Warranties are direct costs associated with the production of the product because each
comes with a standard manufacture warranty, which is honored by Dell. Dell has to
account for this cost each quarter and adjust as necessary.
2. Shipping Costs are indirect costs associated with the geographical area in which the
products are produced and shipped.
3. Research, Development, and Engineering Costs are direct costs associated with payroll,
contractor fees, and administrative expenses.
4. Website Development Costs are indirect costs associated with the maintenance and minor
enhancement to the features and functionality of its websites.