QUES: Beijing Paper Ltd:
Beijing Paper Ltd is a multinational Chinese paper company, which has a division in Australia. In Australia, Beijing Paper has two paper mills, one of which is located in Dallas, Victoria. The?Dallas mill produces 30 different types of coated and uncoated specialty printing papers. Management?was convinced that the value of the large variety of products more than offset the extra costs of the?increased complexity.
During 2016, the Dallas mill produced 120 000 tonnes of coated paper and 80 000 tonnes of uncoated?paper. Of the 200 000 tonnes produced, 180 000 were sold. Four products account for 80% of the tonnage?sold. Thus, 26 products are classified as low-volume products.
Foam Kraft 85gsm (FK) is one of the low-volume products. FK is produced in?rolls, converted into sheets of paper and then sold in cartons. In 2016 the cost to produce and sell one?tonne of FK was as follows.
Direct materials: Quantity
Pulp (3 different types) 1112 kilograms $450
Additives (11 different items) 100 kilograms $500
Tub size 38 kilograms $10
Recycled scrap paper (148 kilograms) $(20)
Total direct materials $940
Direct labour: $450
Overhead:
Paper machine ($100 per tonne x 1250 kilograms) $125
Finishing machine ($120 per tonne x 1250 kilograms) $150
Total overhead $275
Shipping and warehousing $30
Total manufacturing and selling cost $1 695
Overhead is applied by using a two-stage process. First, overhead is allocated to the paper and?finishing machines by using the direct method of allocation with carefully selected cost drivers. Second, the overhead assigned to each machine is divided by the budgeted tonnes of output. These rates are then multiplied by the number of kilograms required to produce one good tonne.
In 2016, FK sold for $2200 per tonne, making it one of the most profitable products. A similar examination of some of the other low-volume products revealed that they also had very respectable profit margins. Unfortunately, the performance of the high-volume products was less impressive, with many showing losses or very low profit margins. This situation led Grace Wang, the Manager for the Australian division to call a meeting with her marketing director, Sadia Khan, and her Chief Financial Officer (CFO), Debbie Benson.
GRACE: The above-average profitability of our low-volume specialty products and the poor profit performance of our high-volume products make me believe that we should switch our marketing emphasis to the low-volume line. Perhaps we should drop some of our high-volume products, particularly those showing a loss.
SADIA: I'm not convinced that solution is the right one. I know our high-volume products are of high quality, and I'm convinced that we are as efficient in our production as other firms. I think that somehow our costs are not being assigned correctly. For example, the shipping and warehousing costs are assigned by dividing these costs by the total tonnes of paper sold. Yet ...
DEBBIE: Sadia, I hate to disagree, but the $30-per-tonne charge for shipping and warehousing seems reasonable. I know that our method to assign these costs is identical to a number of other paper companies.
SADIA: Well, that may be true, but do these other companies have the variety of products that we have? Our low-volume products require special handling and processing, but when we assign shipping and warehousing costs, we average these special costs across our entire product line. My records indicate quite clearly that virtually all of the high-volume products are sent directly to customers, whereas most of the low-volume products are sent to the distribution centre. I'm not convinced that all products should receive a share of the receiving and shipping costs of the distribution centre as currently practised.
GRACE: Debbie, is this true? Does our system allocate our shipping and warehousing costs in this way?
DEBBIE: Yes, I'm afraid it does. Sadia may have a point. Perhaps we need to reevaluate our method to assign these costs to the product lines.
GRACE: Sadia, do you have any suggestions concerning how the shipping and warehousing costs should be assigned?
SADIA: It seems reasonable to make a distinction between products that spend time in the distribution centre and those that do not. We should also distinguish between the receiving and shipping activities at the distribution centre. All incoming shipments are packed on pallets and weigh one tonne each (there are 42 cartons of paper per pallet). In 2016, the receiving department processed 46 000 tonnes of paper. Receiving employs 15 people at an annual cost of $900 000. Other receiving costs total about $802 000. I would recommend that these costs be assigned by using tonnes processed. Shipping, however, is different. There are two activities associated with shipping: picking the order from inventory and loading the paper. We employ 30 people for picking and 10 for loading, at an annual cost of $1 900 000. Other shipping costs total $1 700 000. Picking and loading are more concerned with the number of shipping items than with tonnage. That is, a shipping item may consist of two or three cartons instead of pallets. Accordingly, the shipping costs of the distribution centre should be assigned by using the number of items shipped. In 2016, for?example, we handled 150 000 shipping items.
GRACE: These suggestions have merit. Debbie, I would like to see what effect Sadia's?suggestions have on the per-unit assignment of shipping and
warehousing for FK. If the effect?is significant, then we will expand the analysis to include all products.
DEBBIE: OK, I will compute the effect.
GRACE: Great, thank you.
To help in the analysis, Debbie gathered the following data for FK for 2016:
Tonnes sold 30
Average cartons per shipment 2
Average shipments per tonne 21
REQUIRED:
1. Identify the flaws associated with the current method of assigning shipping and warehousing costs to Beijing's products.
2. Compute the shipping and warehousing cost per tonne of FK sold by using the new method suggested by Sadia and Debbie.
3. Using the new costs computed in requirement 2, compute the profit per tonne of FK. Compare?this with the profit per tonne computed by using the old method. Do you think that this same effect would be realised for other low-volume products? Explain.
4. Comment on Grace's proposal to drop some high-volume products and place more emphasis on low-?volume products. Discuss the role of the accounting system in supporting this type of decision making. Support your discussion referring to relevant literature (academic and professional).
5. After receiving the analysis of FK, Grace decided to expand the analysis to all products. She also?had Debbie reevaluate the way in which mill overhead was assigned to products. After the?restructuring was completed, Grace took the following actions: (a) the prices of most lowvolume?products were increased, (b) the prices of several high-volume products were decreased, and (c) some low-volume products were dropped. Explain why her strategy changed so dramatically.
6. Discuss the benefits and limitations of ABC. Which companies/industries would derive a benefit from ABC? And which companies/industries would not derive a benefit from ABC? Your answer has to be supported by relevant academic and professional literature.
Please note:
? It is required to write a written report of 1500 words, in which you answer all the questions listed at the end of the case study below. When answering questions 4 and 6, you are expected to support your arguments with relevant literature from academic and professional journals/magazines. We would expect at least 10 prime reference sources(blogs, Internet discussions and Wikipedia are NOT acceptable as references. Preferably, limit the use of textbooks as references, and use instead relevant academic and professional journal articles). An assignment with less than 10 prime reference sources is unlikely to have demonstrated enough research to form defendable conclusions and will be assessed accordingly.
? Any material used must be acknowledged and appropriately referenced (Harvard Referencing). Marks are awarded for report format, structure, spelling, grammar, punctuation etc.
? Tables or figures are acceptable and they should be fully discussed and analyzed. Tables or figures should be numbered sequentially, given appropriate captions and placed in the main body of this report at suitable points. Use of footnotes and Appendices are not permissible. Make sure the written report does not contain plagiarism. This is done automatically when submitting written report to the Turnitin.