The Stewart Box Company The Stewart Box Company is a profitable company with a functional structure in place as well

as identified responsibility centers. The company has well established strategic planning, cost estimates and costing procedures. In an industry where competition is tight due to capacity requirements in manufacturing plants, the company was able to tap the market for custom- made carton boxes. However, its market is still limited to within the 500mile radius of its manufacturing site, thus 15% of the time the company has to under cost to be able to fulfil the volume requirements for its operation, and 65% of the time they are priced higher than their competitors. Furthermore, cost estimates established based on the previous years data were used to cost custom-made jobs which do not accurately capture actual costs spent for the job orders. To address these issues, the company has to put in place measures to encourage its sales force to tap other markets and new customers to fulfil volume requirements, as well as revalidate its costing procedures to include activity based costing, which will better capture costs spent on job orders, and ultimately improve the companys bottom line. CASE CONTENT Stewart Box Company is a medium-sized packaging company that manufactures paperboard cartons and boxes. It is a profitable in its operation having distinguished itself from the competition by offering custom made boxes and delivering on time. The company is functionally structured with identified responsibility centers. However there are still areas for improvements such as in accounting, budgeting, planning, and pricing system. Strengths and shortcomings were identified, and proposal on improvements were highlighted in the Analysis section of this report. PROBLEM DEFINITION In an industry where competition is tight for volume orders, Stewart Box Company has established its niche market in custom made boxes for his clients. However it has limited its market to within the 500 mile radius of his manufacturing plant resulting to underutilized capacity of his plant. Further, the job costing procedures in computing for job order costs are estimates based on the values from previous year but based on industry prices, his prices are higher 65% of the time. THE FRAMEWORK FOR ANALYSIS AND AREAS OF CONSIDERATION Evaluation of the current structure, control systems and strategies to identify cause of the defined problem. Areas of consideration is the market penetration, capacity utilization and costing system. Proposal of improvements in the system will also be presented in the decision portion of this paper. ANALYSIS Answers to Questions: 1. a. A transfer price was used in connection with two items. What are these two items? Paper Board and Carton. b. Assuming that inventory levels did not vary in December, what was the actual Cost of Goods sold manufactured in the carton factory? (Actual COGS) 787,000 (Variance) 29,000 = 758,000. c. Why is the assumption in question b necessary to answer that question? Because variation in inventory is added into the computation of cost of goods sold d. What is the budgeted amount of corporate expense? $86,000. e. In December was activity in the board mill above or below the standard volume? It was above standard volume. 2.

a. What was the actual cost of labor pressmen? $9416. b. What was the budgeted amount of total controllable cost? The budgeted amount of controllable cost was (Actual Amount) $16,847+ (Variance) $830 = $16,017 c. What amount of total controllable cost was applied to products? (Labor-pressmen) 9,416 + (Laborhelpers) 3,318 + (Press Supplies) 597 = 13,331 d. Why do no amounts appear in the spending variance column for departmental fixed costs and allocated costs? No amounts appear in the spending variance for departmental fixed costs and allocated costs because they are non-negotiable fixed costs. 3. As his assistant, write a memorandum calling Mr. Stewarts attention to matters you think he should note when he reads Exhibit 4. MEMORANDUM TO: Mr. Robert Stewart FROM: Assistant SUBJECT: Points to consider when reading Exhibit 4 A close look at the income statement allows us to compare the performance of the paperboard mill and the carton factory. The revenues for both centers show favorable variances, and since sales volume increased, the unfavorable variance for cost of goods sold is to be expected. However, note that the COGS and variance for the paperboard mill is at $26, and that of the carton factory is at $29. The transfers to carton factory are also at $26, which implies that the unfavorable variance was passed on to the carton factory. If this is taken out of the carton factory COGS, its unfavorable variance would only be $3. It may be beneficial to investigate the management controls being implemented in the paperboard mill, as it is less cost efficient than the carton factory. 4. Do the same with Exhibit 5. MEMORANDUM TO: Mr. Robert Stewart FROM: Assistant SUBJECT: Points to consider when reading Exhibit 5 The spending report shows unfavorable variances for labor (both pressmen and helpers), even though press supplies show a favorable variance. This merits investigation because f the unfavorable variance in labor spending was due to an unexpected increase in production volume, we should also see an unfavorable variance in press supplies, but that is not the case. Additionally, there is a high unfavorable variance for Repairs in December, even though the variance for the year is favorable. Management should determine if the high repair expenses for December are due to unexpected breakdowns, or if they are due to deliberate postponements of repairs throughout the year. 5. What do you regard as the particularly strong points of the system described in t his case? What are its weak points? Can you suggest ways of overcoming these weaknesses? General Points about Stewart Box Company Reach: Global Competition - N/A Reaction: Quick Customer Feed on Products and Services Strength Responsiveness: Shortened Concept-to-Customer Cycle Time - Strength Refinement: Greater Customer Sophistication and Specificity - Strength Reconfiguration: Reengineering of Work Patterns and Structures Weakness

Redeployment: Reorganization and Redesign of Resources Weakness Reputation: Quality and Reliability of Product and Process - Strength A Focused Discussion on the Companys Strengths, Weaknesses, and Areas for Improvement Market The company has established a niche market in making custom made cartons. However based on his capacity requirement, there is a need to increase the sales volume. Current market is limited to a 500 mile radius of where his plant is located. Accounting Stewart Box uses a job-costing system with standard costs. These costs are based on annual estimates of labour and factory overheads. Since the timeframe used for estimates is very long, it is possible for estimates to be inaccurate. For example, running cost of machines or prices of utilities could be different from a year ago, when compared to present time. This means the standard costs can become erroneous. It would be better to incorporate Activity Based Costing method in conjunction with the job costing method currently employed. This will result to a more dynamic system which examines costs on a regular basis and make necessary adjustments to the allocation of costs quickly and accurately. Furthermore, with jobcosting fixed costs need to be allocated per job. If the allocation is incorrect, the costing will also be incorrect. These errors can be passed on to the customer, and also reflected on management reports and financial statements. The paper mill is identified as a profit center which means they may be passing on their costs to the carton division to mask inefficiencies. Since the paper mill acts more like a support entity to the carton factory, it would be better to treat it as a cost center. Pricing Because of the accounting practices of annual cost estimation, the pricing system of the company is also affected. Labor and overhead rates could be misquoted as being too high or too low, causing over-pricing or under-pricing, which have negative effects. The companys products are generally priced higher than its competitors, partly because they are specialized in natures, but the costing structure could be a culprit as well. If the pricing strategy used more recent and accurate cost estimates, then it might be able to price its products lower. The companys high price can also be attributed to the fact that it includes 20% profit in its computed price, plus additional profit when it gives quotations to customers. On some occasions, the company prices below cost if there is excess capacity. The company might be better off with a consistent pricing strategy (lower), with reasonable profit, and hence attract more customers so it would not have to drop prices when there is low demand. Strategic Planning At Stewart Box, superintendents are included in strategic planning. Since strategic planning is an annual event, they should consider having only the division heads included. There should be separate planning sessions for operations with per department task breakdown, planning, budgeting, etc., cascading and transforming strategic goals to actionable items. Highlighted in these plans should be departmental goals, achievements, and strategic targets for the upcoming year. This will result in a more organized and effective strategic planning session. DECISION Expand the sales volume to maximize the capacity of his production output. This could be done by

incorporating standard sized cartons in addition to custom made ones. Incorporate Activity Based costing with Job Costing method to capture actual costs incurred accurately. JUSTIFICATION Expansion of sales volume to fully utilize capacity As discussed in the Analysis section of this report, Stewart Box Company has limited its customer base by geographical restrictions so it has not been able to obtain larger sales volume. It can still deploy its marketing and sales force beyond the 500-mile radius. This can mean more volume and a potentially more efficient operation. Its carton factory is only 50% utilized, so there is excess capacity available for further business. The paper mill runs 3 shifts per day, whereas the carton factory only runs 1.5 shifts per day. If the company can increase its volume and utilize the 3 shifts, they could be more efficient. Start-up time and costs will be minimized since they will have longer runs. In addition, if the company can gain more business in the standard sized cartons, they can lessen tooling changeovers, and further reduce downtime and costs, leading to more efficient production. The costs the reduce adds to their profits, so they would have more room to lower prices and be more competitive. Incorporate Activity Based costing with Job Costing method to capture actual costs incurred accurately. By using Activity Based costing in conjunction with Job Costing, the company can have more accurate estimates of overhead costs. Furthermore, if job costing is done on a more regular basis, like monthly for example, its standard rates will be closer to actual. The outcome of this would be more precise price estimates. They would not need to employ such a high profit rate of 20% plus mark-up. Therefore, the company can price its products lower and attract more business. Consequently, it would be easier to win new customers with lower pricing. This is also in line with the preceding decision to expand capacity, and should make that task easier. OPERATIONALIZE THE DECSION Expand the sales volume to maximize the capacity of his production output. This could be done by incorporating standard sized cartons in addition to custom made ones. 1. Determine available capacity and exploit new market segments by going into retailing and exploring market beyond the 500-mile radius to satisfy volume requirements. 2. Increase and motivate sales force to by increasing volume based commission. Include incentives for winning new customers. 3. Improve on after sales service to induce client loyalty. 4. Offer discount on bulk orders. 5. Computerization of supply chain. Introduce internet-based ordering. 6. Offer low introductory pricing to attract customers Incorporate Activity Based costing with Job Costing method to capture actual costs incurred accurately. 1. Identify the cost drivers. 2. Assign all costs associated with the cost drivers. 3. Sum the costs of the cost drivers that make up the product. 4. Costs computed in steps 1-3 to be used as overhead cost in job costing. 5. Revalidation of standard cost estimates to be done more frequently. 6. Use revised and more accurate costs estimates in budget and price estimat