The paper 'Flows of the Current Method of Assigning Shipping and Warehousing Costs to Tiger’ s Products" is an outstanding example of a finance and accounting assignment. The current method of cost assignment has a number of flows. Shipping and warehousing costs are assigned by dividing the associated costs by the total number of Tonnes of paper sold. This is despite the fact that some of the company’ s products require special handling as well as processing. When assigning the warehousing and shipping costs, such special costs are averaged across the entire product line (Krishnan, 2006).
This is despite the fact that all of the company’ s high-volume products are sent directly to customers with most of the low volume products being sent to the distribution center. Yet all the products receive a share of the receiving and shipping costs of the distribution center regardless of whether such costs were incurred on them or not. Thus, the current allocation system fails to distinguish between products which spend time in the distribution center and those that do not. The system also fails to distinguish between the receiving and shipping activities at the distribution center thus failing to assign such costs using the number of Tonnes processed.
On the other hand, the current system fails to distinguish the shipping activities which are more concerned with the number of shipping items other than tonnage given that shipping may consist of two or three cartons as opposed to pallets. Shipping and warehousing costs per tonne of FK using the new method suggested by Sadia and Debbie Warehousing costs = Receiving and Shipping costs Receiving costs are based on the number of tonnes processed. Sipping costs = Picking and loading Shipping costs are based on the number of items shipped Allocation of warehousing costs Warehousing costs per tonne = Total cost/ Number of tonnes processed = ($900,000+ $802,000)/46,000 tonnes = $1,702,000/46,000 tonnes =$37 per tonne But 30 tonnes were sold, thus; Warehousing costs for FK = Warehousing cost per tonne* Number of tonnes sold = $37*30 = $1,110 Shipping costs per tonne = Total cost/ Number of items shipped = $3,600,000/150,000 shipping items = $24 per item For 30 tonnes = 24*21 =$504 NB// A shipping item may consist of two or three cartons Tonnes sold= 30 Average shipments per tonne = 21 Number of shipments for 30 tonnes = 21*30 = 630 Number of cartons for 30 tonnes = 630*2 = 1,260 But a shipment item is 2 or 3 cartons (2 in this case) Number of shipment items for FK = 1,260/2 = 630 shipment items Shipping costs for the 30 tonnes = 630 items * $24 = $15,120 Thus: Shipping cost for FK =$15,120 or $504 per tonne Warehousing cost =$1,110 or $37 per tonne (Senthil, M2010) Warehousing and shipping cost per tonne = $504+$37 = $541 Profit computation for FK Direct materials Quantity Amount 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 Paper Machine ($100 per tonne * 1250 Kilograms) $125 Finishing machine ($120 per tonne * 1250 Kilograms) $150 Total overhead $275 Shopping and warehousing (504+37) 541 Total manufacturing and selling cost ($2,206) Selling price $2,200 Loss on sale per unit $ (6) Using the new method, a tonne of FK realizes a loss of $6 as compared to the old method which put profit at $505 per unit of FK.
I think this effect would be realized for other low-volume products since their Shipping and warehousing cost is obviously understated under the old method at $30 per tonne as opposed to the new method that assigns the warehousing and shipping cost on the basis of activity for each of the company’ s products (Michael, 2001). A comment on Grace’ s proposal to drop some high-volume products and place more emphasis on low-volume products
Krishnan, A2006, An application of activity based costing in higher learning institution: A local case study, Contemporary Management Research, vol. 2, no. 2, pp. 75-90.
Senthil, M2010, The success and failure of activity based costing systems, Journal of Performance Management vol. 23, no. 2, pp. 3-18.
Michael, C2001, The complete guide to activity based costing, London, Rutledge.
Hilton, W2005, Managerial accounting: this century and beyond. Management Accounting Research, vol. 6, pp. 281-286.
Reeve, R2004, Adoption of activity management practices. A note on the extent of adoption and the influence on organizational and cultural factors, Management Accounting Research, vol. 15, pp. 323-350.
Kurt, H&, Hoyle, J2016, Using activity based costing (ABC) and Activity Based Management in service organizations, Retrieved on 25th April 2016, from;
Bouwman, J2002, The association between activity-based costing and improvement in financial performance, Management Accounting Research, vol. 13, pp. 1-30.
Hicks, M2009, Activity based costing: Making it work for small and medium-sized companies, New York, John Willey & Sons.
Jackman, M2003, Note on a New Zealand replication of the Innes et al. UK activity- based costing survey, Management Accounting Research, vol. 14, pp. 67-72.
Wilkinson, J2013, Activity based costing (ABC) vs. Traditional costing, Retrieved on 25th April 2016, from;