Current Costing and Billing System - Johnson Beverage, Inc - Assignment Example

Johnson Beverage, Inc. Johnson Beverage, Inc. The research report will show how the current costing and billing system is affecting the business of Jonson Beverage, INC (JBI). Researching will reveal the current billing and costing system by demonstrating its main features. The study will expose the weakness of the current costing system. The study will use cost accounting systems like Activity Based Costing (ABC) to find solution to the current overhead cost woes.it will do so by first exposing the costs and then promote a more cost effective way of dealing with operational expenses. The research will also show the difference between JBI’s current costing systems and recommend new ones that will be more cost effective than the current regimes. The research will also calculate the customer profitability of companies’ like Saver Superstore, Oscar’s OddLots, Midwillen Supermarkets and Downtown Retail. The study will offer recommendations as to the problems affecting the JBI as an organization. Introduction An executive summary of Johnson Beverages According to Elbashir (2014), Johnson Beverages INC. (JBI) is a business that distributes beverages to retail customers. It has owned and managed by Jack Johnson for two decades. Its specialty is distributing bottled sports drinks manufactured by small specialty beverage companies. Last year it made $ 12 million by servicing 20 customers whose purchases totaled from $ 100,000 to $ 1miliion annually.It sold $ 15.20 per case of 24 bottles without any discount. The cost of bottled drinks per case was $ 13.10 per case, but this was not inclusive of customer service cost since that is an overhead cost. However, JBI offered discounts to its customer by putting various factors into consideration. These factors included; volume of drinks purchased by the client, future potential of the customer, and negotiation success of the sales representatives’, etc. The business has realized that the cost of maintaining a customer base is increasing over the years. Customers are demanding lower prices that have consequently led to the dilemma of how to keep old loyal customers happy without making losses. Some of the customers include Saver Superstore whose manager is being courted by a rival that is leading to strained relations between JBI and saver superstore as the later wants lower prices. Consequently, Johnson (owner), Marsha Ketchum (sales manager), Joe Stevens (driver) and Jim Thomas (accounting department) meet in order to discuss how to counter this competition problem as well as looking for the various ways they can keep their old and loyal customers. They tried to look at the options of keeping the customers happy, and one of them is offering them a discount. However, considering that Saver Superstore was already one of their lowest margin customers (Find Appendix 1); they decided against it since they would have to do so to other clients which would reduce their revenue even further. To get the margin per customer they usually get the total income of the sales per customer less the total cost of goods per case. Another challenge is that they cannot directly link the client service costs ($1.2 million per year) directly to one customer. The other challenge that they had to deal with was the cost of transport delivering goods to customers’ premises, cost of rush deliveries for clients who do not anticipate when they will be out of stock. That is why they decided to investigate customer service costs to determine how they could use this to their advantage and increase revenue. Some of the current costs include handling beverages e.g. picking them from the warehouses according to orders, moving them to the dock and delivering them to customers and also coordinating them with the people who take stock and those delivering them. Other costs cost of carrying rush orders since they require extra scheduling. This analysis showed that some customers made more costs of delivery than others (p.1-7). 1. Key features of the current costing and billing systems used by JBI and their weaknesses. JBI’s current charging and billing systems only use the cost of goods and customer service costs when it comes to profits made calculations. This method does not put into consideration the cost of delivering goods to a single client. Consequently, it is hard for JBI to calculate the profit margin they make because some of the customers negotiate for very cheap prices that in turn leads to very little profit margin. They currently use lowering of prices as a method of maintaining big and loyal customers like Saver Superstore. This strategy has a weakness because should all the other big and loyal customers line up for a similar deal like Saver Superstore did, then the organization would end up losing in revenues (Elbashir, 2004, p.1-7). The current costing strategy gives delivery schedule priorities without considering that organizations like Oscars OddLots, also a larger customer but one who usually makes frequent rush deliveries hence causing them “pain factor”, but it creates more revenues than Saver Superstore. The deliberation was also to include the “pain factor” on these other companies and see if more revenue would be generated (Elbashir, 2004, p.1-7). Proposing a more relevant costing system for JBI. Using costing system, you have offered to allocate JBI’s overhead costs According to CPACPD, “ costing system is an official process of identifying, capturing, analyzing and reporting relevant cost information to support decision-making.” Using the stored information is crucial to the organizations calculation of income statements and budgets. (p.4). According to Hunges & Gjerde (2003) say that Activity-Based Costing is a system that determines the activities used in the production and delivery of products as well as calculating the cost of other activities. ABC gives more information for cost management purposes. This system would be useful in exposing the profitable while dealing with its different customers. From exhibit 1 we find that although some of although organizations like Saver Superstore, have high revenues, they also have substantial cost of goods and customer service cost which reduces customer profit. However, organizations like Downtown Retail have little net profits but their customer benefits are the highest. It also exposes detail information on transactions for each client like price per case, number of orders, miles traveled, etc. this are vital in calculating overhead costs. 2. Explain the differences in the assumptions of JBI’s current costing system and the costing system you have recommended in (B.1) above JBI’s current charging and billing systems only use the cost of goods and customer service costs when it comes to profits made calculations. Cost calculation is hard because some of the customers negotiate for very cheap prices that in turn lead to very little profit margin. The same organizations also incur significant customer service cost like Saver Superstore (p.6). On the other hand, the activity-based cost activities used in determining the production and delivery of products as well as calculating the cost of other activities. ABC gives more information for cost management purposes (Hunges & Gjerde, 2003). 3. Use the costing system information calculated in (B.1) above to estimate customer profitability for Saver Superstore, Oscar’s OddLots, Midwellen Supermarket, and Downtown Retail According to Revised Fall (2012), activity based costing is a two stage costing method.overhead costs are put in the overhead cost pool and the costs in each pool applied to the products depending on the natue of the activity they require. This system only affects the overhead costs; direct labor and direct materials appear under the accounting based costing. we can calculate the profitability for Saver Superstore, Oscar’s OddLots, Midwellen Supermarket, and Downtown Retail using the below formula which is Total Overhead cost divided by overhead cost of that organization (p.4). In our case total overhead cost of JBI is 1,200,000 in this case our overhead cost is the customer service value of each corporation. From the tabele below in P.6 of the case Net revenue Saver superstore Oscar’s oddlots Midwellen supermarket Downtown retail Total for JBI Net revenues 1168000 1192000 121520 454500 12000000 Cost of goods 1048000 1048000 104800 393000 10480000 Gross margin 120000 144000 16720 61500 1520000 Customer service cost 116800 119200 12152 45450 1200000 Customer profits 3200 24800 4568 16050 320000 Customer profit in % 0.3 2.1 3.8 3.5 2.7 Cost per visit Saver superstore Oscar’s oddlots Midwellen supermarket Downtown retail Total for JBI Number of sales visits 12 25 18 9 360 1. Saver Superstore = 1200000/116800=10.27 2. Oscar’s OddLots = 1200000/119200 =10.07 3. Midwellen Supermarket =1200000/12152=98.75 4. Downtown Retail =1200000/45450=26.40 To get the total cost of customer service cost per visit using overhead using activity based costing method you multiply the amount per visit above and multiply by number of visits and the get the total 1.Saver Superstore = 10.27*12=123.24 2.Oscar’s OddLots = 10.07*25=251.75 3.Midwellen Supermarket =98.75*18=1777.5 4.Downtown Retail =26.40*9=237.6 Total cost per visit in JBI=2390.09 5. Compare the costs and profit per customer you have calculated using your recommended costing system (B.3) and the estimated costs using JBI’s current costing system: From the calculations, it can be concluded that Midwellen Supermarket and Downtown Retail are doing better than Saver Superstore and Oscar’s OddLots when it comes to profit ratio. Hence, we can conclude that the former two corporations have a chance to garner JBI more benefits in the future. The two systems provide different cost estimates because activity-based cost activities provide more information than the methods currently used by JBI. 6. Which costing system provides management of JBI with better information? Why? Drawing on your answers to (B) above Activity based costing systems is a costing system that classifies the costs in two main parts. I.e. product costs and period costs which include the costs that are administration costs during the time the organization is handling the products for resale. This type of costing system can trace all the overhead costs which the current system at JBI apparently does not allow (Krishnan, 2006, p.76). This information is supported by Hoa (2010) who say that ABC identifies activities performed in an organization and uses many costs drivers to assign overhead costs in producing those products. Fei & Isa (2010) says that for the organizations to succeed they have to consider using costing system like ABC since it can act as one off the strategic tools that can be very helpful for the success of such organizations like JBI. Reference List Elbashir, M. (2014). Johnson Beverages, INC. Darden Business Publishing. P.1-7 Hughes, S.B. & Gjerde, K.A.P (2013).Do Different Cost Systems Make a Difference: Management Accounting Quarterly. Vol. 5(1) CPACPD. (2011). Accounting: Controlling Costs and Improving Decision-Making.pdf. P.1-5 . Retrieved from. http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCIQFjAA&url=http%3A%2F%2Fwww.cpaaustralia.com.au%2Fcpd%2FCA_extract.pdf&ei=5jKIVPnzC4v3Upm3hIAO&usg=AFQjCNENY2HPgjvV8iqprFrTheugcR-xKg&sig2=0kMrGAzPWDQn50J7iE98_g Hoa, N, T. (2010).The Impact And Importance Of Activity Based Costing On Financial Performance Of Manufacturing Firm. Pdf. Retrieved from http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&ved=0CD0QFjAE&url=http%3A%2F%2Fdl.is.vnu.edu.vn%2Fbitstream%2F123456789%2F140%2F1%2FNguyen%2520Thanh%2520Hoa.pdf&ei=pCuIVISfDsf2UsSMgZgM&usg=AFQjCNFO1Ex7DDowWZNtPdgOk-mWiL0OKQ&sig2=yGuMLR9tVEfyg9s4df99AA Krishnan, A. (2006). An Application of Activity Based Costing in Higher Learning Institution: A Local Case Study: Contemporary Management Research. Vol.2 (2). P.75-90 Fei, Z.Y. & Isa, C.R. (2010). Factors Influencing Activity-Based Costing Success: A Research Framework: International Journal of Trade, Economic And Finance. Vol. 1(2) p.144-150 Revised Fall (2012). Chapter 3 Systems Design: Activity-Based Costing Read More