Reference no: EM132637276

Introduction

• Managers at Stoke plc have been using various teams to collect activity-based data since 2000. Each team has consisted of one or more management accountants working closely with department managers. The teams typically work for 3-6 months on data collection and developing spreadsheets. To date the teams have mainly focused on product costing. Recently two teams have been set up to collect data to improve the company's understanding of customer-related costs and profitability. One team has looked at distribution costs and the second at order related costs.

• Only 3 customers were included in the analysis. Theses 3 customers represent 10`% of total sales. The company has approximately 250 customers in total. Finally the teams only considered labour related costs and direct costs for the cost pools.

• The first objective for each team was to estimate the total annual overhead cost and annual volume for each cost driver. As the company only focused on three customers the data was quickly estimated. The second objective was to estimate the percentage of each cost driver per customer.

Collecting Data

• The management accept that a 'cost sampling' or snapshot' approach is the best way to identify key activities and their costs. This technique helps the department to develop estimates of how much time is devoted to different activities. Then by using an average hourly rate for all staff managers will be able to estimate the total annual cost of an activity. The decision to use an average hourly rate for all staff will save time.
• Managers decided that between 4 to 8 activities should to be identified by each team. The possibility of identifying 20-30 activities was considered but this was rejected because there was very little time to do the work. For the whole exercise it was felt that the information must not take too long to collect and interpret.
• Most of the managers involved with the new teams have little experience of collecting data regarding activities and cost drivers. With some activities several cost drivers were discussed. This confused some managers who felt unclear why a cost driver was rejected or accepted. The management accountants believed these problems would not affect the accuracy of the data.

ABC data

Team 1 - Order related overheads

(Data based on 3 customers)

Activity cost pool Cost driver Annual overhead cost for the 3 customers Annual volume for the 3 customers

Changes to orders Number of order amendments                      £50,000                      3,000

Pre-sales support Number of hours of pre-sales support              £100,000                  3,800

Post-sales support Number of hours of post-sales support            £100,000                 2,200

Delayed payments Number of delayed payments over 3 months        £70,000                1,250

Order processing Number of orders                                               £60,000             20,000

Invoicing Number of invoices                                                        £25,000             22,500

Team 2 Distribution costs

(Data based on 3 customers)

Distribution related overhead costs Cost driver Annual overhead cost for the 3 customers Annual volume for the 3 customers

Storage expenses Average cartons in stock               £12,000                5,000

Requisition handling Number of requisitions                   £8,500              10,000

Standard deliveries Number of standard deliveries         £5,000               3,000

Special deliveries Number of special deliveries               £12,800               500

Customer sales and activity analysis

Customer                     North                 South                     East

Annual Sales               £175,000        £178,000           £173,000

The following table summarises the percentage of each cost driver per customer.

Customer                                                 North                  South              East                    Total

                                                                      %                       %                    %                         %

Number of order amendments                   20                 2                   20                    100

Number of hours of pre-sales support           16                10                   30                  100

Number of hours of post-sales support         10                  15                  20                  100

Number of delayed payments                     10                    12                 10                   100

Number of orders                                     10                      30               30                    100

Number of invoices                                    20                        30                50                  100

Average cartons in stock                             40                    30                      30              100

Number of requisitions                                 30                     30                     40               100

Number of standard deliveries                       10                       40                     50             100

Number of special deliveries                          20                        60                    20            100

Problem 1: Calculate the profit for each customer based on the ABC data and discuss what steps the company should consider to improve the profitability of individual customers.

Problem 2: Assume that the company has a complete analysis of all customer-related revenues and costs. Discuss why such data is needed and how it can be used to help a company compete profitably.