General Analysis of Allied office Products

Company background

Allied Office Products was a corporation in Forms Manufacturing which includes business forms and specialty paper. In 1988 the company had expanded into business forms inventory management services and encourage its clients join into "total Forms Control"(TFC) program. Allied had established a separate company within the business forms division to handle TFC. The services offered by TFC included warehousing and distribution of forms as well as inventory control and forms usage reporting.

Current cost Accounting system of TFC

Allied operated TFC activities as a profit center. TFC provided 10 distribution centers for clients to keep inventories of forms and to distribute to clients when they needed. The TFC salespeople could not only use internal sourcing, but also outsourcing for customer orders. The transfer price use fair market value. Clients charged the services fee on product cost plus 32.2%, regardless of the specific level of service, in order to cover the cost of warehousing and distribution, cost of capital inventory and freight expense. Meanwhile, the sales force to charge 20%, on average, as profits margin of product and services. As a result, the individual accounts can vary from standard formula.

Problems of current cost accounting system

Allied used ROI to evaluate the Business Forms Division performing. TFC is projected to earn an ROI of only 6% for 1992 which had a 20% in 1988. TFC profitability was suffering in October 1992. Therefore, General Manger John Malone believed that they were not managing this business well as a profit center. In General, the big problems faced by Allied are:

"Pricing": it is not appropriate that charge the services fee on percentage of product costs. As a profit center, the TFC should have value-added in each activity. In addition, it is also not fair for two clients who buy the same amount of product but uses different level of services to pay the same service fee.

"Customer Profitability": not all customers are profitable. It is very difficult to know which ones are profitable, when the company was using the data on an average basis.

Value Chain Analysis

In order to make TFC more profitable and increase the percentage of ROI, the manager decided to figure out different service fee of various clients. Since each segment in the value chain has input costs and output price and the difference is the value added, the manager tried to find which area can be improved. Through the activity analysis, managers planed to implement activity. The below table shows the different between current cost accounting system and ABC analysis:

Current method ABC Method