Aiwa Company Cost Analysis Issue Report

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a case analysis report (in a PDF format)- no more than 10 pages, double line spacing, including tables, exhibits, and chats. Only one colour must be used in the text – black

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The case - Aiwa Co. Managers at Aiwa Co. Have been using various teams to collect activity-based data since 2000.

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The case - Aiwa Co. Managers at Aiwa Co. 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. 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. The company has approximately 250 customers in total. Only 3 customers were included in the analysis. These 3 customers represent 10% of total sales. 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. 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. ABC data Team 1 - Order related overheads (Data based on 3 customers) Activity cost pool Cost driver Annual overhead cost Annual volume for for the 3 customers 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 Cost driver Annual overhead Annual volume costs cost for the 3 for the 3 customers 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 % % % % 20 2 20 100 16 10 30 100 10 15 20 100 10 12 10 100 10 30 30 100 Number of order amendments Number of hours of pre-sales support Number of hours of post-sales support Number of delayed payments Number of orders Number of invoices Average cartons in stock Number of requisitions Number of standard deliveries Number of special deliveries 20 50 100 30 30 40 30 100 30 30 40 100 10 40 50 100 20 60 20 100 Required a. Calculate the profit for each customer based on the ABC data b. Discuss what steps the company should consider to improve the profitability of individual customers c. Assume that the company has a complete analysis of all customer-related revenues and costs and make your recommendations d. Discuss why such data is needed and how it can be used to help a company compete profitably
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Explanation & Answer

Attached.

Running head: Cost analysis issues

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Cost analysis issues
Name of student
Name of professor
Name of course
Name of institution

Cost analysis issues

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1.0 INTRODUCTION
Cost analysis issue is the inability to accurately analyses cost-related activities and comes up
with valid results (Shank, 1989). Most of the issues in cost analysis are related to fields of
evaluation and enumeration of costs and benefits. It is normally difficult for all costs in the
company without any double counting and most of the costs are intangible and unforeseen.
Evaluation in cost analysis is often based on assumption, for example, the marginal utility of
money is assumed constant for a small element of the demand curve where the changes take
place hence might lead to error in the calculation of the profit value. Another evaluation
assumption is that utilities are assumed to be comparable.
Cost analysis also requires a high level of technical skill and knowledge. The solid ground in
economic techniques and theory beyond the training of many company team members is
required to carry out an effective cost analysis. The company may require hiring an accounting
consultant for effective analysis results.
Another cost analysis issue is that most of the cost analyses are overly simple hence resulting in
conceptual and methodological inadequacies problems. This problem may lead to intervention
failure since unrealistic expectations that cannot be achieved might be promoted.
Standard ways of assigning dollar values in cost analysis are not available, especially while
dealing with qualitative analysis. Also, market costs do not always represent the real social cost
in a company.
Cost analysis for large projects with long-term time might not be sufficient enough to make
important decisions since the analysis might fail to account for critical financial factors such as
the present value of money, interest rates, inflation, and varying cash flows (Zerbe, 2008).

Cost analysis issues

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2.0 BACKGROUND DATA
Various teams at Aiwa.co collected activity-based data to improve the understanding of
customer-related costs and profitability in the company. The objective of this project was to
estimate the total annual overhead cost and annual volume for each cost. Another objective was
to estimate the cost drive percentage per customer while collecting data for easy estimation.
The tables below summarize the finding of the project team members of the Aiwa company on
various cost analyses which include order related overheads cost analysis, distribution cost
analysis, distribution cost analysis, customer sales, and activity analysis, and the percentage of
each cost driver per customer.

Cost analysis issues

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Cost analysis issues

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2.1 Profit for each customer based on the ABC data
Profit=annual sales-total cost
Annual sales for a customer from North=$175,000
Annual sales for a customer from South=$178,000
Annual sales for a customer from East=$173,000
Total cost for 3 customers=Total order related overheads cost +Total distribution cost
Total order related overheads cost=50,000+100,000+100,000+70,000+60,000+25,000=$405,000
Total distribution cost=12,000+8,500+5,000+12,800=$38,300
Total cost for 3 customers=$405,000+$38,300=$443,300
Total cost for each customer=total cost for customers/3=$443,300/3=147,766.67=$147,767
Profit for customer from North=$175,000-$147,767=$27,233
Profit for customer from South=$178,000-$147,767=$30,233
Profit for customer from East=$173,000-$147,767=$25,233
2.2 Steps the company should consider to improve the profitability of individual customers
Managing customer segmentation is one of the steps that should consider improving customer
profitability. Customer segmentation is the process of grouping or dividing customers for easy
decision making. This enables the company to offer different advertising and value to different
customers based on preferences, behaviors, and personal characteristics.

Cost analysis issues

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Another step is measuring customer segment margins. Companies should consider measuring
revenue and gross profit of every customer segment o improve customer profitability. Allocating
sales, customer service, and marketing costs improve the cost analysis hence profitability.

Measuring customer lifetime value is another effective step used to improve customer
profitability in the company. This introduces a new dimension that can be used to understand
customer value. Customer lifetime value treats customers as corporate assets hence attract
customers and increased future income.

Another step is measuring customer impact. This allows the company to make advances in
understanding customer profitability and estimates of the value of every customer.

Managing customer profitability helps in putting together various parts of customer profitability
measures and ensures that all effective values of improving profitability in the company are put
in place and control to ensure continuous customer profitability over time.

Cost analysis issues

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Steps used to improve customer profitability (Zerbe, 2008)

2.3 Recommendations

Despite the company putting customers' needs as a priority and increased customer centricity,
difficulty in finding out which customers are profitable and which are not is a challenge.
Therefore, it is recommended for companies to invest in customer relationships to sustained long
term profitability.

It is also recommended for the company to spend its efforts on meeting the customer's
expectations. Failure to meet customers' expectations can lead to losing customers to
competitors. Customers are looking for brands that understand their struggles and needs and
work hard to ensure they provide these requirements.

The company should also develop a deeper understanding of its customers. This empowers the
company to start offering quality services and products to the customers who satisfy their
requirements hence retaining and attracting more customers.

2.4 Importance of ABC data and uses of data for competing profitably in the company

ABC data are required for customer profitability analysis. This helps in giving ...


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