Determining Profitability by Product and Customer

An Extension of Problem 12-A2

Panel A Exhibit 12-23, L.A. Darlings Product-Cost System

Power Department General Costs Maintenance Department

Power
MWH

Occupancy (Plant)
Square Feet
O

Department Resources
Machine Hours.

Assembly Supervisors
SUP SUP M O

Machines
M

SUP

Setup Activity

Assembly Activity

Setups
SA

Machine Hours
AA

Parts

Direct Labor

Parts
SA AA

Direct Labor

SA

AA

Parts

Direct Labor

SA

AA

Display Type A
Product Cost = $16.27

Display Type B Display Type C

Product Cost = $26.44 Product Cost = $50.90

Assembly Department

Panel A Exhibit 12-23, L.A. Darlings Product-Cost System

Power Department General Costs Maintenance Department

L.A. Darlings P & L: Sales COGS GP Selling expenses

Power
MWH

Occupancy (Plant)
Square Feet
O

Department Resources
Machine Hours.

Assembly Supervisors
SUP SUP M O

Machines
M

Administrative expenses
M O

SUP

General expenses Operating income

Setup Activity

Assembly Activity

Setups
SA

Machine Hours
AA

Taxes
SA AA

Parts

Direct Labor

Parts
SA AA

Direct Labor

SA

AA

Parts

Direct Labor

Net income

Display Type A
Product Cost = $16.27

Display Type B Display Type C

Product Cost = $26.44 Product Cost = $50.90

Assembly Department

Panel A Exhibit 12-23, L.A. Darlings Product-Cost System

Power Department General Costs Maintenance Department

L.A. Darlings P & L: Sales COGS GP Selling expenses

Power
MWH

Occupancy (Plant)
Square Feet
O

Department Resources
Machine Hours.

Assembly Supervisors
SUP SUP M O

Machines
M

Administrative expenses
M O

SUP

General expenses Operating income

Setup Activity

Assembly Activity

Setups
SA

Machine Hours
AA

Taxes
SA AA

Parts

Direct Labor

Parts
SA AA

Direct Labor

SA

AA

Parts

Direct Labor

Net income

Display Type A
Product Cost = $16.27

Display Type B Display Type C

Product Cost = $26.44 Product Cost = $50.90

Assembly Department

Where in the P & L do these costs appear?

Panel A Exhibit 12-23, L.A. Darlings Product-Cost System

Power Department General Costs Maintenance Department

L.A. Darlings P & L: Sales COGS GP Selling expenses

Power
MWH

Occupancy (Plant)
Square Feet
O

Department Resources
Machine Hours.

Assembly Supervisors
SUP SUP M O

Machines
M

Administrative expenses
M O

SUP

General expenses Operating income

Setup Activity

Assembly Activity

Setups
SA

Machine Hours
AA

Taxes
SA AA

Parts

Direct Labor

Parts
SA AA

Direct Labor

SA

AA

Parts

Direct Labor

Net income

Display Type A
Product Cost = $16.27

Display Type B Display Type C

Product Cost = $26.44 Product Cost = $50.90

Assembly Department

Where in the P & L do these costs appear?

Panel A Exhibit 12-23, L.A. Darlings Product-Cost System

Power Department General Costs Maintenance Department

Power
MWH

Occupancy (Plant)
Square Feet
O

Department Resources
Machine Hours.

Assembly Supervisors
SUP SUP M O

Machines
M

SUP

Setup Activity

Assembly Activity

Setups
SA

Machine Hours
AA

Parts

Direct Labor

Parts
SA AA

Direct Labor

SA

AA

Parts

Direct Labor

SA

AA

Display Type A
Product Cost = $16.27

Display Type B Display Type C

Product Cost = $26.44 Product Cost = $50.90

Assembly Department

L.A. Darling has three major customers: Wal-Mart, Kmart, and Walgreens. How would Darling integrate productcost data in a system to determine the profitability of these customers?

Panel A Exhibit 12-23, L.A. Darlings Product-Cost System

Power Department General Costs Maintenance Department

Panel B L.A. Darlings Customer-Profitability System without Cost-to-Serve

Power
MWH

Occupancy (Plant)
Square Feet
O

Consider Wal-Mart

Department Resources
Machine Hours.

Assembly Supervisors
SUP SUP M O

Machines
M

SUP

Setup Activity

Assembly Activity

Setups
SA

Machine Hours
AA

Parts

Direct Labor

Parts
SA AA

Direct Labor

SA

AA

Parts

Direct Labor

SA

AA

Display Type A
Product Cost = $16.27

Display Type B Display Type C

Product Cost = $26.44 Product Cost = $50.90

Assembly Department

Panel A Exhibit 12-23, L.A. Darlings Product-Cost System

Power Department General Costs Maintenance Department

Panel B L.A. Darlings Customer-Profitability System without Cost-to-Serve

Power
MWH

Occupancy (Plant)
Square Feet
O

Department Resources
Machine Hours.

Wal-Marts gross profit from display type A is the number of A units purchased times the gross profit per unit.
GP Display Type A = Price of A $16.27

Assembly Supervisors
SUP SUP M O

Machines
M

SUP

Setup Activity

Assembly Activity
A Mix of WalMart
SA AA

Setups
SA

Machine Hours
AA

Parts

Direct Labor

Parts
SA AA

Direct Labor

SA

AA

Parts

Direct Labor

WMGP

Display Type A
Product Cost = $16.27

Display Type B Display Type C

WMGP

Product Cost = $26.44

Product Cost = $50.90

Assembly Department

Wal-Mart Profitability

Panel A Exhibit 12-23, L.A. Darlings Product-Cost System

Panel B L.A. Darlings Customer-Profitability System without Cost-to-Serve

A similar calculation is made for display types B and C to determine total profitability for Wal-Mart.
GP Display Type A = Price of A $16.27 GP Display Type B = Price of B $26.44 GP Display Type C = Price of C $50.90

A B A Mix of WalMart C

WMGP

WMGP

Wal-Mart Profitability

Panel A Exhibit 12-23, L.A. Darlings Product-Cost System

Panel B L.A. Darlings Customer-Profitability System without Cost-to-Serve

A similar calculation is made for Kmart and Walgreens.

GP Display Type A = Price of A $16.27

GP Display Type B = Price of B $26.44

GP Display Type C = Price of C $50.90

A B A Mix of WalMart C

B B

B
C A Mix of Walgreens C

A
Mix of Kmart

WMGP

KMGP

WGGP

WMGP

KMGP

WGGP

Wal-Mart Profitability

Kmart Profitability

Walgreens Profitability

Panel A L.A. Darlings P & L: Exhibit 12-23, L.A. Darlings Product-Cost

Sales COGS GP

System

Panel B L.A. Darlings Customer-Profitability System without Cost-to-Serve

Selling expenses Administrative expenses General expenses Operating income Taxes Net income

Now Darling knows how gross profit is distributed among its major products and customers. But it has not assigned costs to serve its customers. These costs are mostly GP Display Display GP Display expenses selling and someGP Type B = Type C = Type A = Price of B of C Price of A administrative and general Price expenses $26.44 $50.90 $16.27 on the P & L. How be B would this C A done? B B B
A Mix of WalMart C

A
Mix of Kmart

A Mix of Walgreens

WMGP

KMGP

WGGP

WMGP

KMGP

WGGP

Wal-Mart Profitability

Kmart Profitability

Walgreens Profitability

Panel A Exhibit 12-23, L.A. Darlings Product-Cost System

Panel C L.A. Darlings Customer-Profitability System with Cost-to-Serve

Resources used by the three cost-to-serve activities.

Interviews with operating personnel will identify key costto-serve activities such as pre- and postsales support, order processing, type of shipping, and order changes. Resources consumed will also be identified and assigned to these activities.

Cost-to-Serve Activity 1 Act. 1

GP Display Type A = Price of A $16.27

Cost-to-Serve Activity 2 Act. 2

GP Display Type B = Price of B $26.44

Cost-to-Serve Activity 3 Act. 3

GP Display Type C = Price of C $50.90

A B A Mix of WalMart C

B B

B
C A Mix of Walgreens C

A
Mix of Kmart

WMGP

KMGP

WGGP

WMGP

KMGP

WGGP

Wal-Mart Profitability

Kmart Profitability

Walgreens Profitability

Panel A Exhibit 12-23, L.A. Darlings Product-Cost System

Panel C L.A. Darlings Customer-Profitability System with Cost-to-Serve

Resources used by the three cost-to-serve activities.

Plausible and reliable cost-allocation bases are chosen in order to allocate activity-cost pools to customer cost objects.

Cost-to-Serve Activity 1 Act. 1

GP Display Type A = Price of A $16.27

Cost-to-Serve Activity 2 Act. 2

GP Display Type B = Price of B $26.44

Cost-to-Serve Activity 3 Act. 3

GP Display Type C = Price of C $50.90

A B A Mix of WalMart C

B B

B
C A Mix of Walgreens C

A
Mix of Kmart

WMGP

KMGP

WGGP

WMGP

Act. 1

Act. 2

Act. 3

KMGP

Act. 1

Act. 2

Act. 3

WGGP

Act. 1

Act. 2

Act. 3

Wal-Mart Profitability

Kmart Profitability

Walgreens Profitability

Now Darling Panel A can Exhibit 12-23, L.A. Darlings Product-Cost calculateSystem gross profit by product,

Panel C L.A. Darlings Customer-Profitability System with Cost-to-Serve

Resources used by the three cost-to-serve activities.

L.A. Darlings P & L: Sales COGS GP Selling expenses

A

Cost-to-Serve Activity 1 Act. 1

GP Display Type A = Price of A $16.27

Cost-to-Serve Activity 2 Act. 2

GP Display Type B = Price of B $26.44

Cost-to-Serve Activity 3 Act. 3

GP Display Type C = Price of C $50.90

A B C Mix of WalMart

B B

B
C A Mix of Walgreens C

A
Mix of Kmart

Administrative expenses
General expenses

WMGP

KMGP

WGGP

Operating income

WMGP

Act. 1

Act. 2

Act. 3

KMGP

Act. 1

Act. 2

Act. 3

WGGP

Act. 1

Act. 2

Act. 3

Taxes
Net income

Wal-Mart Profitability

Kmart Profitability

Walgreens Profitability

Now Darling Panel A can Exhibit 12-23, L.A. Darlings Product-Cost calculateSystem gross profit by product, customer,

Panel C L.A. Darlings Customer-Profitability System with Cost-to-Serve

Resources used by the three cost-to-serve activities.

L.A. Darlings P & L: Sales COGS GP Selling expenses

A

Cost-to-Serve Activity 1 Act. 1

GP Display Type A = Price of A $16.27

Cost-to-Serve Activity 2 Act. 2

GP Display Type B = Price of B $26.44

Cost-to-Serve Activity 3 Act. 3

GP Display Type C = Price of C $50.90

A B C Mix of WalMart

B B

B
C A Mix of Walgreens C

A
Mix of Kmart

Administrative expenses
General expenses

WMGP

KMGP

WGGP

Operating income

WMGP

Act. 1

Act. 2

Act. 3

KMGP

Act. 1

Act. 2

Act. 3

WGGP

Act. 1

Act. 2

Act. 3

Taxes
Net income

Wal-Mart Profitability

Kmart Profitability

Walgreens Profitability

Now Darling Panel A can Exhibit 12-23, L.A. Darlings Product-Cost calculateSystem gross profit by product, customer, and operating income by customer.
L.A. Darlings P & L: Sales COGS GP Selling expenses
A

Panel C L.A. Darlings Customer-Profitability System with Cost-to-Serve

Resources used by the three cost-to-serve activities.

Cost-to-Serve Activity 1 Act. 1

GP Display Type A = Price of A $16.27

Cost-to-Serve Activity 2 Act. 2

GP Display Type B = Price of B $26.44

Cost-to-Serve Activity 3 Act. 3

GP Display Type C = Price of C $50.90

A B C Mix of WalMart

B B

B
C A Mix of Walgreens C

A
Mix of Kmart

Administrative expenses
General expenses

WMGP

KMGP

WGGP

Operating income

WMGP

Act. 1

Act. 2

Act. 3

KMGP

Act. 1

Act. 2

Act. 3

WGGP

Act. 1

Act. 2

Act. 3

Taxes
Net income

Wal-Mart Profitability

Kmart Profitability

Walgreens Profitability