Briefly Speaking Inc

briefly speaking inc Case study
Briefly Speaking Incorporation Case Study

David John Vagolu
11/02/2016
Applied Financial Analysis

Sheridan College
Table of Contents
Executive Summary.............................................................................................................3
Introduction..........................................................................................................................9
Critical Success Factors.......................................................................................................9
Problem Statement...............................................................................................................9
Analysis.............................................................................................................................10
Alternative Solutions.........................................................................................................14
Recommended Solution.....................................................................................................15
Implementation Plan..........................................................................................................16
Conclusion.........................................................................................................................20
3
Executive Summary
I am an accountant working for Briefly Speaking Incorporation. I am assigned to evaluate the

Activity Based Costing method as an alternative to the companys traditional costing system for
computing the unit product costs.
Briefly Speaking Incorporation produces standard and
specialty briefcases. Currently they are thinking to get out of the standard line and focus the
whole plant on specialty work. Below I have applied Activity Based Costing method for Briefly
Speaking Incorporation and provided solutions, recommendations and implementation plan to
correctly compute the unit product costs.
Briefly Speaking Incorporation produces briefcases from leather, fabric and synthetic materials.
The standard briefcase made from leather lined and fabric is a high quality item and sold well for
many years. The specialty briefcases are big in size and contain the finest synthetic materials and
have the buyers name embossed on them. They have differentiated themselves in the market by
providing high quality and attractive features to their products. Briefly Speaking Incorporation
charges just $50 per unit for specialty briefcase whereas their biggest competitor charges over
$65 per unit for its specialty items. And also for specialty briefcase Briefly Speaking
Incorporation does cutting and stitching by automated machines thus reducing the labor costs. By
doing so they made their presence in the market as a low cost provider.
Currently Briefly Speaking Incorporation is applying its manufacturing overhead to its products
on the basis of direct labor hours. By doing so, although the resource consumption patterns of
standard and specialty briefcase products differ much, the manufacturing overhead cost of $9 per
unit is allocated to each standard and specialty briefcase. This resulted in inappropriate
calculation of unit product cost as $35 for standard briefcase and $32.50 for specialty briefcase.
This further resulted in incorrect calculation of gross margin per unit as $1 for standard briefcase
and $17.50 for specialty briefcase. If this method continues then it may lead a manager to use the
distorted cost information and force them to make a flawed decision of shutting down the
standard product line and focus on specialty work.
The solution that I would like to recommend is to implement Activity Based Costing method and
increase the selling price of specialty briefcase to $55. Under the activity based costing method
the overhead cost per unit of standard briefcase is $4.11. The monthly production of standard
briefcase is 9000 units. This results in the total overhead cost for the standard briefcase is
$36,987.5. Similarly the overhead cost for specialty briefcase under Activity Based Costing is
$28.56. The monthly production of specialty briefcase is 2250 units which results in the total
overhead cost of $64,260. The unit product cost is $30.11 for standard briefcase and $52.06 for
specialty briefcase. Now by computing the gross profit margin it can be noticed that the standard
briefcase is up by $4.89 and specialty brief case is down by $19.56. So under Activity Based
Costing method the total gross profit margin for standard brief case increased by $44,010 per
month and for specialty briefcase it decreased to $(4,635) per month. So if the company shuts
down the standard line and continues to produce specialty briefcases it will incur a loss of $4,635
per month. The standard briefcase generates a positive gross profit margin of $53,010 per month
under Activity Based Costing method. Hence it is not recommended to shut down the standard
line and focus entirely upon specialty briefcase. On the other hand if the company runs both the
product lines and does not increase the selling price of specialty briefcase it will still incur a loss
of $4,635 per month on specialty briefcase. So it is recommended to increase the selling price to
$55 to generate a positive gross profit margin of $6,615 per month for specialty briefcase. And
under traditional costing system the overhead allocated to specialty briefcase is just $9 whereas
under Activity Based Costing method it is $28.56. So it is the main reason why the competition
is unable to touch the price of specialty briefcase offered by Briefly Speaking Incorporation.
The below implementation plan should be followed step by step to implement the recommended
solution.
1. Identify various activities causing overhead costs:
The first thing is to identify the major activities that are causing bulk of the overhead
costs. The various major activities causing overhead costs are listed below.
a. Order receiving
b. Material receipts
c. Production scheduling
d. Machine set up
e. Machine Inspection
f. Assembly
g. Machining.
2. Create Activity Cost Pools:
Activity cost pool is a cost bucket in which costs related to a particular bucket are
accumulated. The below are the different activity cost pools for the activities mentioned
above.
Activity Cost Pool
Purchasing
Materials Handling
Production orders & setup
Inspection
Frame Assembly
Machine related
3. Identify the activity measure for each activity cost pool:
Activity measure expresses how much of the activity is carried out and is used as the
allocation base for applying overhead costs to products and services.
Activity Cost Pool
Activity Measure
Purchasing
Materials Handling

Inspection
Frame Assembly
Machine related
Number of Orders
a. Leather
b. Fabric
c. Synthetic Material
Number of Receipts
a. Leather
b. Fabric
Set-up-Hours
Inspection Hours
Assembly Hours
Machine Hours
4. Calculate the expected activity volume for each activity measure:

The below table shows the expected activity volume for every activity measure of standard and
Activity Measure
Number of Orders
a. Leather
b. Fabric
Number of Receipts
a. Leather
b. Fabric
Set-up-Hours
Inspection Hours
Assembly Hours
Machine Hours
specialty briefcase.
Expected Activity Volume

Standard
Briefcase
Specialty
Briefcase
Total
24
51
46
79
100
70
130
100
46
70
14
10
160
180
500
800
4500
60
80
160
225
800
1600
9000
45
300
800
4500
5. Calculate the predetermined activity rate for each activity cost pool:
Activity rate is a predetermined overhead rate in an ABC system. The activity rates are
calculated as shown in the below table.
Estimated
Cost
(a)
Overhead Total Expected Activity

Activity Rate
Activity Cost Pool
Volume
(a/b)
(b)
$42.5
Purchasing
$12,750
300
per order
$50 per
Materials Handling
$15,000
300
receipt
$100
Production Orders & Setup
$22,500
225
per hour
$20 per
Inspection
$16,000
800
hour
$5 per
Frame Assembly
$8,000
1600
hour
$3 per
Machine Related
$27,000
9000
hour
6. Allocate activity costs to desired cost objects:
The cost of the expected activities are allocated to the desired cost objects as shown
below.
Activity
Standard Brief Case

Expected
Activity
Amount
Specialty Brief Case

Expected
Activity
Amount
$
24
1,020.00
51
2,167.50
Purchasing
$
46
1,955.00
79
3,357.50
100
4,250.00
14
700.00
10
500.00
160
8,000.00
180
18,000.00
500
10,000.00
$
$
$
46
2,300.00
70
3,500.00
Materials Handling
$
$
$
45
4,500.00
Inspection
300
6,000.00
8
$
Frame Assembly
800
4,50
Machine Related
4,000.00
800
4,000.00
13,500.00
4,500
13,500.00
7. Calculate overhead cost per unit of standard and specialty briefcase:

Standard Briefcase
Specialty Briefcase
$
Total Overhead Costs

36,987.50
Number
of
Units
Produced
9,000
64,262.50
2,250
$
Overhead Cost per unit
4.11
28.56
8. Calculate unit product cost of each product line:

Costing Method
Activity Based Costing
Unit Product Cost

Standard Briefcase
Specialty Briefcase
$
$
30.11
52.06
9. Calculate profitability by increasing the selling price of specialty briefcase to $55 per
unit:
Profitabilit
y
Standard Briefcase
Specialty Briefcase
$
Selling Price
36.00
$
55.00
$
Unit Product Cost
30.11
Gross
Profit
Margin
5.89
$
52.06
$
2.94
The implementation of Activity Based Costing for allocating the overhead cost to the
products and setting the selling price of specialty briefcase to $55 generates the below gross
profit margins.
Standard
Briefcase
Gross Profit Margin per
$53,010
Specialty
Briefcase
$6,615
month
Introduction
I am an accountant working for Briefly Speaking Incorporation. I am assigned to evaluate the
Activity Based Costing method as an alternative to the companys traditional costing system for
computing the unit product costs.
Briefly Speaking Incorporation produces standard and
specialty briefcases. Currently they are thinking to get out of the standard line and focus the
whole plant on specialty work. Below I have applied Activity Based Costing method for Briefly
Speaking Incorporation and provided solutions, recommendations and implementation plan to
correctly compute the unit product costs.
Critical Success Factors
Product Differentiation:
Briefly Speaking Incorporation produces briefcases from leather, fabric and synthetic materials.
The standard briefcase made from leather lined and fabric is a high quality item and sold well for
many years. The specialty briefcases are big in size and contain the finest synthetic materials and
have the buyers name embossed on them. They have differentiated themselves in the market by
providing high quality and attractive features to their products.
Low Cost:
10
Briefly Speaking Incorporation charges just $50 per unit of specialty briefcase whereas their
biggest competitor charges over $65 per unit for its specialty items. And also for specialty
briefcase Briefly Speaking Incorporation does cutting and stitching by automated machines thus
reducing the labor costs. By doing so they made their presence in the market as a low cost
provider.
Problem Statement
Currently Briefly Speaking Incorporation is applying its manufacturing overhead to its products
on the basis of direct labor hours. By doing so, although the resource consumption patterns of
standard and specialty briefcase products differ much, the manufacturing overhead cost of $9 per
unit is allocated to each standard and specialty briefcase. This resulted in inappropriate
calculation of unit product cost as $35 for standard briefcase and $32.50 for specialty briefcase.
This further resulted in incorrect calculation of gross margin per unit as $1 for standard briefcase
and $17.50 for specialty briefcase. If this method continues then it may lead a manager to use the
distorted cost information and force them to make a flawed decision of shutting down the
standard product line and focus on specialty work.
Analysis
Applying Activity Based Costing method for allocating the overhead costs to the standard and
specialty briefcase according to their respective resource consumption patterns.
Computing Activity Rates
Basic Data
Activity
Cost Pool
Purchasing
Estimat
Activity
ed Overhead
Measure
Cost($)
12750
Number
Orders
Expected
Volume
Standar
Specialt
d
y
of Briefcas Briefcas
e
e
Activity
Total
Materials
Handling
Production
orders
&
setup
Inspection
Frame
Assembly
Machine
related
15000
22500
16000
8000
27000
11
a. Leather
b. Fabric
c.
Synthetic
Material
Number
of
Receipts
a. Leather
b. Fabric
c.
Synthetic
Material
24
51
Set-up-Hours
Inspection
Hours
Assembly
Hours
Machine Hours 0
46
70
46
79
70
130
100
100
14
10
60
80
160
160
45
180
225
300
500
800
800
450
800
450
1600
9000
From this data it can be noticed that the expected activity volume for specialty briefcase is 150
orders more than standard briefcase. Similarly 68 receipts, 135 production orders & set up, 200
inspection hours are more for specialty briefcase when compared to standard briefcase. So 75%
of the purchasing activity, 61.3% of materials handling activity, 80% of production orders &
setup activity, 62.5% of Inspection activity and 50% each of assembly and machining activities
are done for specialty briefcase. The higher the percentage of activity for specialty briefcase the
higher is the consumption of overhead cost.
Computation of Activity Rates:
Activities
Purchasing
Materials
Handling
Production
Orders & Setup
Estimated
Overhead Cost
(a)
$12,750
Total Expected Activity Activity

Volume
(a/b)
(b)
300
$42.5 per order
$15,000
300
$50 per receipt
$22,500
225
$100 per hour
Rate

Inspection
Frame Assembly
Machine Related
12
$16,000
$8,000
$27,000
800
1600
9000
$20 per hour

$5 per hour
$3 per hour
Computation of overhead costs per unit of product:

Activity
Purchasing
Activity
Rate
Activity
Measure
$42.5
per
order
Number of
Orders
Standard Brief Case

Expected
Activity
Amount

Expected
Activity
Amount
$
a. Leather
24
1,020.00
b. Fabric
51
2,167.50
$
46
1,955.00
79
3,357.50
Materials
Handling
c. Synthetic
Material
$50 per Number of
receipt
Receipts
10
0
$
4,250.00
$
a. Leather
46
2,300.00
70
3,500.00
$
14
700.00
10
16
500.00
$
b. Fabric
c. Synthetic
Material
Production
$100
Set-upOrders & Setup per hour Hours
$20 per Inspection
Inspection
hour
Hours
0
Frame
$5 per Assembly
Assembly
hour
Hours
0
Machine
$3 per Machine
Related
hour
Hours
500
Number of Units Produced
$
0
$
45
30
4,500.00
18
0
$
6,000.00
80
50
4,
80
$
$
36,987.50
9,00
0
$
4.11
$
10,000.00
13,500.00
$
18,000.00
4,000.00
$
8,000.00
$
4,000.00
4,
500
$
13,500.00
$
64,262.50
2,25
0
$
28.56
13
From the above tables it can be concluded that the overhead cost incurred by the specialty
briefcase is 63.5% of the total overhead cost. And the applied overhead cost per unit of standard
brief case is $4.89 more than the actual overhead cost. And the applied overhead cost per unit of
specialty briefcase is $19.56 less than the actual overhead. This over applied and under applied
overhead costs leads to inappropriate calculation of unit product costs.
Computing Product Costs:
Standard
Briefcase
Specialty
Briefcase
$
Direct Materials
20.00
$
17.50
$
Direct Labor
Manufacturing
Overhead
6.00
$
6.00
$
4.11
$
28.56
$
Unit Product Cost
30.11
$
52.06
Comparing Product Costs

Unit Product Cost
Standard
Specialty
Briefcase
Briefcase
$
30.11
52.06
Direct Labor Hour Based
$
Costing
35.00
32.50
Costing Method
$
$
The unit product costs shows that the standard briefcases are being charged $4.89 more under
traditional costing system and specialty briefcases are being charged $19.56 less under traditional
costing system. This inappropriate charging of costs to the products leads to incorrect gross profit
margins.
Profitability:
Profitability
Standard
Specialty
14
Briefcase
Briefcase
$
Selling Price
36.00
$
50.00
$
Unit Product Cost
30.11
$
52.06
Gross Profit Margin 5.89

(2.06)
By allocating the correct amount of overhead costs to the products by using Activity Based
Costing it can be noticed that the specialty briefcase are actually in loss of $2.06 per unit. And
standard briefcase gross profit margin is up by $4.89 per unit. These changes increases the
standard briefcase gross profit margin by $44,010 and decreases the specialty brief case gross
profit margin by $4,635. So the total gross profit margin under traditional system and ABC
(Activity Based Costing) system for standard briefcase is $9,000 and $53,010. And the total
gross profit margin under traditional system and ABC (Activity Based Costing) system for
specialty briefcase is $39,375 and $(4,365).
Alternative Solutions
The first solution that I would like to suggest is to consider Activity Based Costing method for
allocating manufacturing overhead cost to its products and set the selling price of specialty
briefcase to $55. By using Activity Based Costing method the overhead cost per unit of standard
briefcase is $4.11 and for specialty brief case is $28.56. The overhead cost is not allocated
equally to both the products unlike the traditional costing system. By applying the correct
amount of overhead under Activity Based Costing the unit product cost is $30.11 for standard
briefcase and $52.06 for specialty briefcase. By considering these unit product costs the gross
profit margin for standard briefcase is $5.89 per unit and for specialty briefcase is $(2.06). This
represents that the gross profit margin for standard brief case is increased by $4.89 per unit and
for specialty briefcase decreased by $19.56 per unit. In order to earn profit for specialty briefcase
the selling price per unit of specialty briefcase can be set to $55 which is more than the unit
15
product cost of $52.06. This increase in selling price will generate positive gross profit margin of
$2.94 per unit for specialty briefcase. The selling price of $55 per unit for specialty briefcase is
nearly $10 less than the market price. So the demand for the product continues although there is
a $5 increase in the selling price.
The second solution that I would like to suggest is to increase the selling price of specialty
briefcase to $55 per unit without implementing the Activity Based Costing method. By doing so
the loss of $2.06 incurred by specialty briefcase can be mitigated. And this could generate the
total gross margin of $50,625 per month for specialty briefcase. However on the other hand there
will be a loss of $44,010 per month in the gross margin for standard briefcase.
Recommended Solution
The solution that I would like to recommend is to implement Activity Based Costing method and
increase the selling price of specialty briefcase to $55. Under the activity based costing method
the overhead cost per unit of standard briefcase is $4.11. The monthly production of standard
briefcase is 9000 units. This results in the total overhead cost for the standard briefcase is
$36,987.5. Similarly the overhead cost for specialty briefcase under Activity Based Costing is
$28.56. The monthly production of specialty briefcase is 2250 units which results in the total
overhead cost of $64,260. The unit product cost is $30.11 for standard briefcase and $52.06 for
specialty briefcase. Now by computing the gross profit margin it can be noticed that the standard
briefcase is up by $4.89 and specialty brief case is down by $19.56. So under Activity Based
Costing method the total gross profit margin for standard brief case increased by $44,010 per
month and for specialty briefcase it decreased to $(4,635) per month. So if the company shuts
down the standard line and continues to produce specialty briefcases it will incur a loss of $4,635
per month. The standard briefcase generates a positive gross profit margin of $53,010 per month
16
under Activity Based Costing method. Hence it is not recommended to shut down the standard
line and focus entirely upon specialty briefcase. On the other hand if the company runs both the
product lines and does not increase the selling price of specialty briefcase it will still incur a loss
of $4,635 per month on specialty briefcase. So it is recommended to increase the selling price to
$55 to generate a positive gross profit margin of $6,615 per month for specialty briefcase. And
under traditional costing system the overhead allocated to specialty briefcase is just $9 whereas
under Activity Based Costing method it is $28.56. So it is the main reason why the competition
is unable to touch the price of specialty briefcase offered by Briefly Speaking Incorporation.
Implementation Plan
The below implementation plan should be followed step by step to implement the recommended
solution.
1. Identify various activities causing overhead costs:
The first thing is to identify the major activities that are causing bulk of the overhead costs. The
various major activities causing overhead costs are listed below.
Order receiving
Material receipts
Production scheduling
Machine set up
Machine Inspection
Assembly
Machining.
2. Create Activity Cost Pools:

Activity cost pool is a cost bucket in which costs related to a particular bucket are
accumulated. The below are the different activity cost pools for the activities mentioned
above.
17
Activity Cost Pool

Purchasing
Materials Handling
Inspection
Frame Assembly
Machine related
3. Identify the activity measure for each activity cost pool:
Activity measure expresses how much of the activity is carried out and is used as the
allocation base for applying overhead costs to products and services.
Activity Cost Pool
Activity Measure
Purchasing
Number of Orders
a. Leather
b. Fabric
Number of Receipts
a. Leather
b. Fabric
Set-up-Hours
Inspection Hours
Assembly Hours
Machine Hours
Materials Handling

Inspection
Frame Assembly
Machine related
18
4. Calculate the expected activity volume for each activity measure:
The below table shows the expected activity volume for every activity measure of standard and
Activity Measure
Number of Orders
a. Leather
b. Fabric
Number of Receipts
a. Leather
b. Fabric
Set-up-Hours
Inspection Hours
Assembly Hours
Machine Hours
specialty briefcase.
Expected Activity Volume

Standard
Briefcase
Specialty
Briefcase
Total
24
51
46
79
100
70
130
100
46
70
14
10
160
180
500
800
4500
60
80
160
225
800
1600
9000
45
300
800
4500
5. Calculate the predetermined activity rate for each activity cost pool:
Activity rate is a predetermined overhead rate in an ABC system. The activity rates are
calculated as shown in the below table.
Activity Cost Pool
Purchasing
Materials Handling
Inspection
Estimated
Cost
(a)
Overhead Total Expected Activity

Activity Rate
Volume
(a/b)
(b)
$42.5
$12,750
300
per order
$50 per
$15,000
300
receipt
$100
$22,500
225
per hour
$16,000
800
$20 per
19
hour
Frame Assembly
$8,000
Machine Related
1600
$27,000
$5
per
$3
per
hour
9000
hour
6. Allocate activity costs to desired cost objects:

The cost of the expected activities are allocated to the desired cost objects as shown
below.
Standard Brief Case
Expected
Activity
Amount
Activity

Expected
Activity
Amount
$
24
1,020.00
46
Purchasing
1,955.00
$
51
2,167.50
79
3,357.50
$
100
4,250.00
14
700.00
10
500.00
160
8,000.00
180
18,000.00
500
10,000.00
800
4,000.00
4,500
13,500.00
$
46
2,300.00
70
3,500.00
Materials Handling
$
$
$
45
4,500.00
Inspection
300
6,000.00
Frame Assembly
800
4,50
4,000.00
$
Machine Related
13,500.00
7. Calculate overhead cost per unit of standard and specialty briefcase:

Standard Briefcase
Specialty Briefcase
$

36,987.50
Number
of
Units
Produced
9,000
$
64,262.50
2,250
20
$
4.11
28.56
8. Calculate unit product cost of each product line:

Costing Method
Unit Product Cost

Standard Briefcase
Specialty Briefcase
$
$
30.11
52.06
9. Calculate profitability by increasing the selling price of specialty briefcase to $55 per
unit:
Profitabilit
y
Standard Briefcase
Specialty Briefcase
$
Selling Price
36.00
$
55.00
$
Unit Product Cost
30.11
Gross
Profit
Margin
5.89
$
52.06
$
2.94
The implementation of
Activity Based Costing for allocating the overhead cost to the products and setting the selling
price of specialty briefcase to $55 generates the below gross profit margins.
Standard
Briefcase
Gross Profit Margin per
month
$53,010
Specialty
Briefcase
$6,615
Conclusion
Briefly Speaking Incorporation has to replace the existing traditional costing system with the
Activity Based Costing method for allocating the overhead costs to its products. And also the
selling price of specialty briefcase has to be set to $55 per unit. The recommended solution
21
should be executed as per the implementation plan provided. This will provide correct allocation
of overhead costs and generation of positive gross profit margin for both the products produced
by Briefly Speaking Incorporation.

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