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CHAPTER 5

Activity-Based Costing and Management


Teaching Notes for Cases and Articles from the
Cases and Readings Manual
5-1 Blue Ridge Manufacturing (Activity-Based Costing for Marketing Channels)
Case Description:
Blue Ridge Manufacturing produces and sells towels for the U.S. sport towel market. A sport towel is a towel
that has the promotion of an event or a log printed on it. Most often they are used in connection with major sporting
events such as the Super Bowl.
Teaching Objectives:
The main teaching objective of the case is to illustrate, with an extensive numerical exercise, the use of
value chain analysis for profitability analysis. The analysis follows an ABC model, in which selling and
administrative costs are allocated to customer groups for the purpose of analyzing customer profitability.
Main Points:
Activity-Based Costing
Value Chain Analysis
Customer profitability analysis
Discussion Questions:
1. What is Blue Ridges competitive strategy?
Strategi saat ini tampaknya menjadi kombinasi fokus (on the southeast states) dan cost leadership.
Manufaktur adalah pabrik dengan fasilitas yang terus berkembang, termasuk penggunaan ABC costing untuk
biaya produksi dan komitmen untuk memperkenalkan teknik lanjutan perusahann manufaktur. Hal ini
menunjukkan komitmen untuk efisiensi produksi dalam jumlah yang banyak, hal ini merupakan karakteristik
dari cost leadership perusahaan. Karena produk ini lebih seperti sebuah komoditas, kecuali Blue Ridge memiliki
hak eksklusif dari tim olahraga, tidak mungkin mereka bersaing pada diferensiasi.
Namun, dengan pengenalan dari tinta baru yang tidak beracun dan tidak pudar ketika dicuci, perusahaan
tampaknya akan pindah ke strategi diferensiasi. Bukti lebih lanjut ini adalah perusahaan melakukan going
nasional, itu akan lebih fokus pada kualitas, dan tertarik dalam mengidentifikasi Pelanggan. Semua ini
menunjukkan upaya untuk membedakan perusahaan dari pesaingnya.

2. What type of cost system does Blue Ridge use, and is it consistent with their strategy?
System pembiayaan ABC konsisten digunakan dengan strategi cost leadership. Hal Ini juga akan membantu
perusahaan dalam mengidentifikasi pelanggan yang paling menguntungkan, dimana perusahaan ini bergerak
untuk strategi diferensiasi yang didasarkan pada kualitas dan inovasi.

3. Develop a spreadsheet analysis, which can be used to assess the profitability of the three customer groups of
Blue Ridge -- large, medium and small customer account size. Use the information in Tables 1-4 to trace and
allocate the costs necessary for the analysis.
The solution is shown on the attached spreadsheet. The solution process involves three stages:
Stage 1: Alokasikan SG & A Costs (Selling, General & Administrative)
1. Collect all SG & A costs incurred in each function (Shipping, Sales, Marketing) as showed in Table 4A
of the case.
2. For each function, collect usage % for each activity (Entering P.O., Commissions, Shipping, Invoicing,
Making Sales Calls, Checking Credit, Samples & Catalog Information, Special Handling, Distribution
Management, Marketing by Customer Type, Advertising & Promotion, Marketing, Administrative
Office Support, and Licenses & Fees) as shown in 4A.
3. Then, allocate function costs to activities by usage %.
Stage 2: Allocate activity costs to Customer Type (Large, Medium, Small).
1. Identify cost drivers (as shown in Table 4) and their consumption statistics for each customer type (as
shown in Table 1).
2. Calculate cost driver consumption % for each customer type.
3. Allocate activity costs to customer type.
Stage 3: Customer Profitability Analysis.
1. Calculate revenues for each customer group (sales quantities from Table 1 and unit prices from Table
2).
2. Calculate manufacturing cost (Regular, Mid-size, Hand, Special), customizing cost (Inking,
Embroidery, Dyeing), SG & A cost and total costs for each customer group (using data from Tables 1
& 2).
3. Calculate customer profits ($102,661, $49,742, -$4,828) and profit per customer ($12,833, $323, -$6)
for each customer type.
Note that the analysis makes it clear the group of large customers provide most of the profits for Blue
Ridge. Show how the cost of purchase orders, shipping, the medium and small customer groups predominantly
cause credit checks, advertising, and marketing. The analysis shows clearly that these two groups, on a per
customer basis, are marginally profitable. This analysis indicates that Blue Ridge should concentrate on its largest
customers and/or determines how to make its smaller customers more profitable. This is especially important if the
firm is planning to go national and this may bring in an even larger portion of medium and smaller customers.

Blue Ridge Manufacturing


First Stage Allocation: Allocate SG&A Costs to SG&A Activities
First: SG&A Costs
Administration
Selling

Second: SG&A
ACTIVITIES
Enter P.O.
Commissions
Shipping
Invoicing
Sales Calls
Check Credit
Samples...
Sp Handling
Distribution
Marketing, Customer
Advertising
Marketing
Administrative
Licenses, fees
TOTAL

Shipping
17,000
15,500
$32,500
Shipping

Sales
37,400
117,800
$155,200

Marketing
20,400
9,300
$29,700

Percentage of...
Sales
Marketing
55%
10%

15%
20%
10%
10%

30%
10%

5%
10%
5%
30%
50%

15%
0%
100%

Third: Allocate Costs to Activities


Shipping
ACTIVITIES
Enter P.O.
0
Commissions
0
Shipping
21,125
Invoicing
0
Sales Calls
0
Check Credit
0
Samples,...
1,625
Sp Handling
1,625
Distribution
3,250
Marketing, Cust
0
Advertising
0
Marketing
4,875
Administrative
0
Licenses, fees
0
TOTAL
$
32,500

100%

Sales

100%

Marketing
85,360
15,520
0
0
46,560
0
0
0
0
7,760
0
0
0
0
$155,200

0
0
0
0
0
0
2,970
0
2,970
0
8,910
14,850
0
0
$29,700

Source
130,900Table 3
155,000Table 3
$285,900

Other
10%

65%

5%
5%
10%

Other
56,100
12,400
$68,500

Total
Assigned

5%
20%
5%
100%

Other
6,850
0
10,275
13,700
6,850
6,850
0
3,425
0
0
0
3,425
13,700
3,425
$68,500

Table 3
"
"
"
"
"
"
"
"
"
"
"
"
"
"

Total
Assigned
92,210
15,520
31,400
13,700
53,410
6,850
4,595
5,050
6,220
7,760
8,910
23,150
13,700
3,425
$285,900Table 3

Second Stage Allocation: Allocates SA&A Activities to Customer Type (Large, Medium, Small)
First: Identify Cost Driver and Its Consumption Level or Amount
Customer Type...
COST DRIVER
Large
Medium
Small
Units sold- w/o specials
99,770
55,118 116,812
Units sold-Total
100,250
58,544 117,406
Units embroidered
5,959
6,490
29,394
Units dyed
20,536
9,935
12,328
Orders
133
845
5,130
Shipments
147
923
5,431
Invoices
112
754
4,737
%>60days
1
11
122
Revenues (Sales
$308,762
$183,744 $318,024
Value)
Customers
8
154
824
Second: Calculate Cost Driver Percentage for Each Customer Type
Units sold (excl. Special)
0.367
0.203
Orders
0.022
0.138
Shipments
0.023
0.142
Invoices
0.020
0.135
%>60days
0.007
0.082
Revenues
0.381
0.227
Customers
0.008
0.156

0.430
0.840
0.835
0.845
0.910
0.392
0.836

Third: Allocate Activity Costs to Customer Type


ACTIVITIES
Total Cost
Large
Medium
Small
Enter P.O.
92,210
2,008
12,757
77,446
Commissions
15,520
15,520
Shipping
31,400
710
4,458
26,232
Invoicing
13,700
274
1,844
11,583
Sales Calls
53,410
53,410
Check Credit
6,850
51
562
6,237
Samples...
4,595
1,750
1,042
1,803
Sp Handling
5,050
1,010
4,040
Distribution
6,220
2,369
1,410
2,441
Marketing, Cust
7,760
2,956
1,759
3,045
Advertising
8,910
2,228
6,682
Marketing
23,150
8,501
4,696
9,953
Administrative
13,700
5,031
2,779
5,890
Licenses, fees
3,425
3,425
TOTAL
285,900
77,060
53,490 155,350

Total
271,700
276,200 Table 1
41,843 "
42,799 "
6,108 "
6,501 "
5,603 "
134 "
$810,530 "
986 "

1.000From above
1.000From above
1.000From above
1.000From above
1.000From above
1.000From above
1.000From above
Cost Driver/ Allocation Base
(Table 4)
Orders
Revenues (Medium Customers
only)
Shipments
Invoices
Revenues (Large
Customers only)
%>60days
Revenues
Estimate (20% M, 80% S)
Revenues
Revenues
Estimate (25% M, 75% S)
Units sold (Excluding Specials)
Units sold (Excluding Specials)
Revenues (Medium Customers
only)
AA

Third Stage: Customer Profitability Analysis


First: Get Revenues by Customer Group
Unit Sales
Large
Regular
27,250
Mid-size
36,640
Hand
35,880
Special
480
Total
100,250
Revenue
Regular
Mid-size
Hand
Special
Total Revenue

Price
$
$
$
$

3.60
3.20
2.55
4.00

Small
10,550
10,308
95,954
594
117,406

54,400 Table 1
65,500 "
151,800 "
4,500 "
276,200

Large
Medium
Small
98,100
59,760
37,980
117,248
59,366
32,986
91,494
50,913 244,683
1,920
13,704
2,376
$308,762
$183,744 $318,024

195,840 Table 2
209,600 "
387,090 "
18,000 "
$810,530BB

Second: Calculate Manufacturing Cost -(1) Unit Cost


Regular
$
1.19
32,428
Mid-size
$
1.03
37,739
Hand
$
0.89
31,933
Special
$
1.44
691
Total
$102,791
Direct Cost of
Unit Cost
Customizing
Inking (Units x 2) $
0.0817
Embroidery
Dyeing

$
$

1.2770
0.1100

(2) Total Cost


Mfg Cost
Customizing
SG&A
Total Cost

Medium
16,600
18,552
19,966
3,426
58,544

19,754
12,554
19,109
10,617
17,770
85,399
4,933
855
$61,566 $109,426

16,381

9,566

19,184

7,610
2,259
$26,249

8,288
1,093
$18,947

37,536
1,356
$58,076

$102,791
$26,249
77,060
$206,101

$61,566 $109,426
$18,947 $58,076
53,490 155,350
$134,002 $322,853

64,736Table 2 x Table 1
67,465 "
135,102 "
6,480 "
$273,783CC

45,131Table 2 x Table 1
53,434
4,708
$103,272DD

$273,783From CC above
$103,272From DD above
$285,900From AA above
$662,955EE

Third: Calculate Customer Profit -(1) Total


(2) Per Customer

$102,661
$12,833

$49,742
$323

$(4,828)
$(6)

$147,575BB-EE
$150