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Kemps LLC Accounting Case

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a k

on 29 March 2011

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Transcript of Kemps LLC Accounting Case

$1350 (programmer @90hr for 15 hours)
$259 (bandwidth with SSL protection)
$129 (24/7 online support & sever maintenance)

-Warehouse for Storage/ Utilites ($8750)
98-100 Rutherford Rd S Unit C2 Brampton, ON
$1.10 per sq ft with DOM at 199
25336 sq ft with 10% for office safe pre-built
Heating and Electricity ($0.40 PSF + TMI) -Wages
Part-time movers initially working at minimum wage (4 employees @$10.25 for 5 hours per week) and 1 sales representative for $20,000 half year contract to sell to wholesalers

Will be outsourced to a hauling company initially as the initial overhead is too much to incur
Hauling will cost $350 per load ($3.76 PPU) -Advertisement
Since its in intro stage we will raise lots of awareness
TV: infomercials, easy way to capture a large audience (ex. channel 19)
Sample product at alcohol stores (LCBO), other food sample stands
Excessive seasonal marketing during Christmas
Holiday promotions (St. pattys)
Retail flyers at big box stores
Ibrahim Abukar, Michael Gizzi, Arsh Karir, Andrew McGaugh, Kartik Sinha, Michelle Tran 1 2 Full line Dairy company

Produces milk, yogurt, ice cream and several other products

HQ is in Minneapolis, MN Influx of large buyers demanding large-scale orders
Felt custom ordering system was wasting valuable resources
Recently switched to a more cost efficient focus strategy in hopes to maximize efficiency
ANALYSIS Was Kemps a good candidate for an activity-based costing system? Why? -A good candidate for an activity based costing system would be a company that produces multiple products which share common costs.

-Easier to accurately identify which customers are profitable and which are not.

-Incorporates factors such as wastages, opportunity costs, idle time of production machinery and relative resource usage.

-Aids in the costing of product distribution. Before, delivery costs were applied evenly to all customers regardless of how much effort went into servicing them

-Since Kemps engages in a wide variety of distribution activities, the original costing system was misleading. The ABC system helps pinpoint costs and pushes the costing system away from standardization.

-Direct labour represents a small percentage of total costs. When direct labour costs are low the ABC system is more effective in accurately shifting costs from higher volume products to lower volume products. Assess the implementation of the time-driven ABC system at Kemps. How well did Kemps implement time-driven ABC? What implementation challenges remain for Kemps and how should it deal with them? How to deal with costs that are “fixed” in the short run? PRODUCTION FILLING FIXED COST INVENTORY SUBCONTRACTING ORDERING SHIPPING/DELIVERY PICKING/LOADING 4 5 How would you advise Kemps on the internal issues that were being debated about use of the ABC system? How should Kemps deal with the customer decisions described on page 8 of the case? Full line Dairy company

Produces milk, yogurt, ice cream and several other products

Clients are SuperValu and Target and smaller local Convenience stores

Sells products under their own brand label

Also produces products to be sold under private store brands and co-packing contracts
- the main issue in the production process was the duration of the run

- the standard costing system that was used before did a poor job of indicating start up and tear down costs because costs were allocated per run

- the previous costing system gave the same cost to a run that lasted 2 minutes to a run that lasted 5 minutes

- TDABC recognizes that it is more efficient for a company to run a production run longer
-complex time equations were able to factor these costs in - changing over between product lines is a costly process for kemps

- the existing cost system does not distinguish between the different product lines

- this is a critical flaw because different product lines (for instance non allergen lines)require much more time and effort to prepare for a changeover

-TDABC’s complex time equations consider the additional time taken to changeover to more resource consuming product lines - the value of complex time equations is fully shown in the picking and loading aspect of the production process.

- during the picking and loading process, workers load either full pallets or partial pallets.

- full pallets are the most efficient use of resources, thus cost less while partial pallets take the same amount of time but derive less revenue

- time driven abc is the best way to distinguish between the two - shipping generally poses a problem of choosing which cost driver to use: miles driven or time on delivery

- time driven ABC forces you to use time driven as the cost driver

- this makes the most sense because miles driven do not account for slow downs in traffic, or the cost of serving the customer while the product is being unloaded Since Kemps’ customer support time is not measured under time-driven ABC, there may be significant inaccuracies as sales people are expected to estimate the amount of time helping each customer annually Alternatives
1 | Create a time equation to incorporate all of the characteristics of each customer to determine an approximate estimate of time spent to support each customer.
2 | Maintain a record of all time spent assisting a customer in a database to be charged to the customer at year end.
Recommendation: Alternative 2
Simplest, most accurate and cost-effective alternative
Alternative 1 may be able to take into account each customer’s characteristics but they may not necessarily correlate to how much time they spend with customer support Recommendation: Alternative 2
Alternative 1 is too complex and time-consuming
With Alternative 2 unnecessary modifications to the equations could be avoided.
o Thus, the incorporation of only material changes would reduce the number of unsatisfied customers that would potentially leave due to rising costs
oCustomer relationship is also a key factor in our decision making Alternatives
1| Monitor the factors that may affect the time equations and change the equations once the factors change

2| Monitor the factors that may affect the time equations and change the equations annually; but only when these changes are material to the costing system
-Assuming that the time equations used are not already being updated, there is an issue of the relevance of the time equations as the firm continues with the new costing system
-Changes in the external and internal factors, of which the time equations are based upon, may significantly alter the accuracy of the estimated costs of production and inventory o Standard costing system: The costs were relative to sales volume and thus considered to be “fixed”•
Only factored in sales volume
Excluded the many aspects involved in Kemps’ complex production and distribution process. o “Fixed” costs could be considered variable under the ABC system with multiple cost drivers.

o Time Driven ABC: Since time is the only cost driver, it has been determined that the fixed costs should not be considered variable.

o Therefore, Kemps has relatively the same operating leverage under TDABC as compared to the standard costing system. ISSUES •Many problems that remain even with time driven-ABC
•Therefore, only reductions in service levels or plant complexity would help lower total costs ALTERNATIVES •The first alternative is to go back to their old method that used a standard costing system with a few minor changes.
•This would allow for a sensible cost comparison
•This would also allow for fixed costs to remain neutral

•A second alternative is to fully implement the time-driven ABC with special focus to certain cost pools
•Target those costs that do not impact overall operations or output
•Reductions will only impact the bottom line RECOMMENDATION •We suggest that Kemps use the 2nd alternative, and fully implement the time-driven ABC system
•They should trying to reduce the costs that won’t impact output or service levels,
•Management must also use some common sense and judgment
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