Accounting Case

Accounting for Decision Making
Project II
JOHNSON BEVERAGE, INC. Case Study
Learning Objectives:
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Design an activity-based costing system
Assess customer profitability using the new system
Use customer cost and profitability data to make strategic decisions
Background information on Activity Based Costing systems:
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Read text Module 19 (pgs 19-3 through 19-18 only)
Read the articles provided on Moodle
Assignment:
Download the Johnson Beverage, Inc. case from the Harvard Business Publishing Website (link is
on Moodle). Read the case study and answer the following:
1. Explain the strategic business issue faced by Johnson Beverage, Inc. (JB).
2. You are a manager at JB and you are faced with the possibility of having to negotiate a
lower price with Saver SuperStore in order to keep them as your customer. Think about
the reasons why a competitor might be able to offer to sell the product at a lower sales
price. Explain (in detail) five possible reasons your competitor can approach this account
with a lower price.
3. Summarize the current system the company is using to allocate customer service costs.
4. What are two pros of using the current system of allocating costs? What are two cons of
using this system?
5. Use the information in case Exhibits 1 and 2 and other necessary data in the case on
activities and costs to develop an activity-based cost system for JB to use to determine
customer profitability. Use this system to estimate customer profitability for Saver
Superstore, Oscar‘s OddLots, Midwellen Supermarket, and Downtown Retail. [Use the
spreadsheet (2 tabs) provided to assist with this question.]
6. Compare the estimated costs you calculate using an activity-based cost system to the
estimated costs using the current system (question 3) of allocating customer service costs.
What causes the costing methods to produce different results? Which costing system
provides JB management with better information? Explain.
7. Conclusion: What are the strategic implications of the above analysis you performed?
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8. Conceptually describe what the activity-based costing system is trying to accomplish.
9. Describe five business recommendations you have for the management of JB based on
what you have learned in this case.
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JOHNSON BEVERAGE, INC.
Allocation Rates for Customer Service Activities under ABC System
*Step 1 of ABCosting – This breaks down each area of customer service into activities and summarizes the costs and cost drivers associated with each activity. The computed allocation rate can then be used to allocate each customer service cost pool to the company’s customers.
Area of
activity
Total $
Cost driver
Quantity of
driver
Allocation
rate
#
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JOHNSON BEVERAGE, INC.
Customer Profitability of Four Customers Using ABC System to Allocate Customer Service Costs
**Step 2 of ABCosting
Saver Superstore
Oscar’s
Midwellen Supermarket
Net revenues
Cost of goods
Gross margin
Customer service costs:
Product handling
Taking orders
Delivering the product
Expediting deliveries
Sales visits
Total customer service costs
Customer profit
Customer profit (% of net revenues)
#
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Downtown Retail