Distribution of Beverages to its Retail Customer - Case Study Example

Johnson Beverage Case Study Answer A A.1. Executive Summary The case is about Johnson Beverage Inc which is a giant in the beverage industry and it is connected with distributing its beverages to its retail customers. It is famous for its strong customer base. But presently the company is facing challenges from its competitors and it is facing difficulty in retaining its customers. The business has flourished with the increase in craze for the sports drink in the last 10 to 20 years. The company realized that it is facing competition from one of its loyal customer. The company therefore analyzed all its accounts and strategies. The company has offered discount to its customers but it also concluded that it cannot lower its price too much. If it offers discount or charge less price for its products from one of its customers then it has to charge lower price from its entire customer which will result in loss for the company. A.2. Main features of current costing and billing system The current costing method that is adopted by Johnson Beverage Inc in order to analyze the costing and profitability of the business and understanding the cost of the business that is underlying in order to analyze the cost and the income drivers. Therefore an in-depth knowledge is required in order to understand the profitability as per the stock keeping unit. For the improvement and development in the costing and profitability of the business the company has adopted job order costing. JBI uses or adopts this costing as it assist JBI in analyzing and evaluating the net cost of its manufacturing process over a definite period of time . Under this method of costing the accurate cost that is incurred in the cost of production of the particular unit are maintained. JBI adopts both job order costing and process costing for different parts of its operations. The main disadvantages in applying or adopting this method of costing are it is very difficult or critical in identifying the overall activities that are undertaken that influences the cost for performing this activities. It is very critical in identifying the preferable cost drive that will evaluate or analyze the cost on the basis of the various activities. JBI mainly adopts fixed cost method for its billing purpose in order to analyze the fixed cost for all its activities and it analyzes and finds out the reason for variations in price. It allows the company in leveraging its efficiency and expertise in order to gain competitive advantage. The main disadvantages in adopting billing system by JBI are that the customers mainly assume the risk arising out of the bad outcome. Answer B B.1. Relevant costing system adopted by JBI Relevant costing may be defined as the cost that will influence in decision making of the company. The most relevant and best costing method that JBI should adopt on the basis of Exhibit 1 and Exhibit 2 is Activity based costing. It can be observed that in Exhibit 1 that the cost of the goods is subtracted or deducted from the revenue in order to generate the gross margin. It also calculates the customer profitability of the company. The profitability of the four customers of JBI namely Saver superstore, Midwellen Supermarket, Oscars odd lots, Downtown retail is analyzed on the basis of various parameters such as the number of orders, deliveries, cases , price and sales visits (Williams, Haka, Bettner and Carcello, 2008). The activity based costing assist in allocating the overhead. Activity costing is most suitable for JBI as it considers various factors for determining and allocating the overhead cost of the product for the customers. Under this costing the product of the company is analyzed on the basis of each of the factors or elements of overhead for production and manufacturing of the products and allocating the price of the products accordingly. Figure 1: Profit erosion Activity based costing In the figure 1 it explains about the profit erosion in the activity based costing. As JBI is facing challenges it retaining its main customers that brings profit for JBI. It will assist JBI in the development and introduction of creating and selling the products to its desired clients. This method of costing is mainly adopted to observe the cost of each activities and then comparing the cost with the profit derived from the activities that are linked with the operation of that particular segment (Innes, Mitchell and Sinclair, 2000).This method is mainly applied for profitability analysis of the client that can be applied for the analysis and measurement of profitability. This type of costing is mainly engaged in performing two activities of allocation namely allocation to production and allocation to activities. Here by analyzing the total activity cost pools and the total activity cost drivers under activity based costing. The activity based cost per unit is derived that is 1.414$ per unit. B.2. Difference in assumptions between JBI’s current costing system (job or process costing) and recommended costing system (activity based costing) Job order or process costing mainly allocates the overhead on the basis of direct labor hours, direct machine hours (Gregory, 2005). On the other hand Activity based costing the overhead cost is allocated on the basis of the job functions. Activities based costing helps or assist the companies in assuming the activities or the steps that is required to identify the overhead cost that is incurred. Under activity based costing the cost drivers are considered as the actual activities that results in increasing the cost pools. Under job order costing the cost related to one job differs from that of the others whereas under activity based costing it maintains a unique cost for all its products. The underlying assumption under activity based costing is that the activities consume the activities on the basis of the cost objects and consume resources. B.3. Costing system information for estimating customer profitability for JBI’s customers Hereby applying the activity based costing the total activity cost and total number of units for activity is calculated for all the four customers of JBI. It is observed that JBI is more concerned in retaining Saver super store but Dowen Town Retail also brings profitability for the company. Therefore the company is required to design its price structure in such a way that it fits the requirements of all the four customers of JBI. B.4. Comparison of cost and profit per customer From the above calculation it can be derived that job costing does not considers all the factors into consideration it mainly focuses on total cost and total unit produced whereas ABC considers all the cost drivers required for calculation. B.4.a. Reasons behind difference cost assumptions by two costing systems The cause for different cost estimate under Activity based costing is it identifies and eliminates the services and the products that are not profitable and reduces the prices of those products that are overpriced and eliminates the services that are ineffective. In case of job order costing it involves or includes the cost that is required for constructing the job or manufacturing the products in batches. Answer C Activity based costing system provides the management of JBI with better information as it identifies the various activities that are performed by JBI and the cost that are allocated to the product. Since there are four important customers of JBI therefore it is required by JBI to adopt activity based costing for evaluating the profitability. C.a. Strategic implications The strategic implication for recommending activity based costing to be adopted by JBI in order to retain the customers, enhance the performance of the company and remain competitive because it helps in analyzing the satisfaction of the customers .It helps in analyzing the purchase price of the product in order to represent the total cost to its customers. It helps in establishing relationship between the cost, activities and products of the company. It helps in developing the accuracy of cost determination. It provides innovation in cost accounting. Therefore in order to retain its important customers JBI should adopt ABC based costing method (Brigham and Ehrhardt, 2011). References Brigham, E. and Ehrhardt, M. (2011). Financial Management: Theory and Practice. Boston: Cengage Learning. Gregory, J.N. (2005). The End of Traditional Budgeting. The Journal of Bank Cost & Management Accounting. 12(1), 27-39. Innes, J., Mitchell, F. and Sinclair, D. (2000). Activity-based costing in the U.K.’s largest companies: a comparison of 1994 and 1999 survey results. Management Accounting Research. 11(1), 349-362. Williams, J. R., Haka, S. F., Bettner, M.S. and Carcello, J.V. (2008). Financial & Managerial Accounting. London: McGraw-Hill Irwin. Read More