Activity Based Cost Report, Customer & Distribution Channel Analysis

This report analyzes the financial performance of an architecture firm and window treatment business, focusing on activity-based costing (ABC), customer profitability, and distribution channel costs. The analysis includes detailed cost breakdowns for direct and overhead expenses, along with the impact of discounts. The report presents an activity-based cost report, customer profitability report, and distribution channel cost report. The analysis reveals that while the architecture firm is more profitable, the window treatment department generates higher gross revenues. The report highlights the impact of overhead allocation and discounts on overall profitability, concluding with recommendations for continued use of ABC and strategic decisions to enhance profitability. The provided bibliography offers additional resources on management accounting and financial analysis.

Solution 1:
ACTIVITY BASED COST REPORT
PARTICULARS
ARCHITECTURE FIRMS WINDOW TREATMENTS TOTA
L
TOTAL OF
BOTH THE
OPERATION
S
ADAMS BETZ TOTAL CHATHAM DEDHAM ELM
Direct Costs 147000 117200 264200 218400 115720 57040 391160 655360
Overhead Costs
(WN1) 85100 136160 340400
Discount Cost
(WN2) 23400 23400 3660 3660 27060
Total Cost 170400 117200 372700 218400 115720 60700 530980 1022820
CUSTOMER & TOTAL PROFITABILITY REPORT
PARTICULARS ARCHITECTURE FIRMS WINDOW TREATMENTS TOTA
L TOTAL
ADAMS BETZ TOTAL CHATHAM DEDHAM ELM
Gross Revenues 234000 188800 422800 357380 147840 73200 578420 1001220
Direct Costs 147000 117200 264200 218400 115720 57040 391160 655360
LESS :

Overhead Costs 85100 136160 340400
Discount 23400 23400 3660 3660 27060
PROFIT 63600 71600 50100 138980 32120 12500 47440 -21600
DISTRIBUTION CHANNEL COST REPORT
PARTICULARS ARCHITECTURE FIRMS WINDOW TREATMENTS TOTA
L
Direct Costs 264200 391160 655360
Overhead Costs 85100 136160 221260
Discounts Given 23400 3660 27060
Total Costs 372700 530980 903680
WORKING
NOTES :
WN1 :
Overhead basis of Allocation

($)
OVERHEADS 340400
ARCH 25%
WIND 40%
GENERAL 35%
WN2 :
In case of activity based costing, the overheads have been allocated as per the percentage stated above. Also, discount is
a cost for the seller. Therefore, it is added to the cost of the two departments.
WN3 :
In case of distribution channel cost report, since there are two departments, the cost shown is associated with
the
at particular department. Therefore, overhead expenditure spent generally is not shown in that
report.

Solution 2:
Louise is engaged in consultation for interior designing and for the treatment of window fabrication business. There are two different distribution
channels one is for the architecture firms and the second is for the window treatment. Louise has two clients for the architecture firms and three
clients for window treatment (Holtzman, 2013).
In this report we will prepare and analyse the activity based cost report, customer profitability and distribution channel report.
ANALYSIS
Activity Based Costing is usually preferred by the company because it allocates the overheads on the basis of resources utilised by each
department. However, the company ignores traditional costing system completely but it provides a fair view of the costs that are involved.
On analysing the customer’s costing, it was observed that the cost that was involved in the windows department was more which amounted to
$530980. We can also see from the customer profitability report that the profits earned from the architecture department were higher. However,
the gross revenue was higher for the windows department when compared to the architecture department (Atkinson, 2012). The costs that
incurred in the windows department was higher than that of architecture department which lead to high profits in the architecture department. In
order to get attract Adam the company gave a discount of 10% which amounted to $23400. The company thought of giving discount in order to
reduce the sale of competitors. However, this was not required as it increased the cost and led to losses of $23400.
The company also decided to provide discount of 5% to the customers who would make cash payments in advance. This act of the company was
still justifiable as it would help in faster cash circulation and would also shorten the operating cycle of the company (Berry, 2009).

On analysing the customer profitability report, we can see that the overall the company is suffering losses. However, the department are earning
profits individually. The reason for the losses is the high amount of overhead and the company’s policy to give discount to the customers. If the
company would not have decided to provide 10% discount to Adam then the company might be at a profit position.
The distribution channel report shows that the total costs are huge in case of windows department because there were huge overhead costs
involved (Menifield, 2014).
RECOMMENDATION
It is recommended that the company must continue allocating its overhead as per activity based costing. The reason behind it is as follows:
- The costs that are associated with any activity and only to the extent it is used is allocated which helps to know about the correct cost
involved in the activity.
- The management of the company comes to know about the actual costs and revenues which helps them in the decision making process.
The management can think of alternate ways that would increase the profitability of the company and then act accordingly.
- The absorption capacity of each department can be understood when this costing method is adopted by the company. It also provides
information about the contributions in the profits made by each department (Seal, 2012).
The company’s decision of providing 10% discount in order to cut the sales of its competitors and attract Adam was not appreciated at all
because it affected the profitability of the company. There were certain other alternatives that the company could have thought of in order to
increase its sales and profits. Few of them are introducing market substitutes or producing at own house.

CONCLUSION
As we know, the business environment is dynamic in nature and therefore the policies and methods adopted by the company have to be revised
from time to time. This statement holds true whether in case of accounting, auditing or costing. The reports must reflect true and fair information
as it influences the decisions of the users of such reports. The decisions that are taken on the basis of these reports are raising loans, investment
decisions and comprising cost with the peer companies (Siciliano, 2015).
Nowadays, it has become more important for the companies to satisfy customers than to earn profits. Usually the primary objective of the
company is to earn profits but if the company fails to satisfy its customers then its survival in the long run becomes questionable. Therefore, the
company must look upon the needs and preferences of its customers. In order to understand the ongoing operations of the company more
precisely it is important to analyse the current situation.

Bibliography
Atkinson, A. A. (2012). Management accounting. Upper Saddle River, N.J.: Paerson.
Berry, L. E. (2009). Management accounting demystified. New York: McGraw-Hill.
Holtzman, M. (2013). Managerial Accounting For Dummies. Hoboken, NJ: Wiley.
Menifield, C. E. (2014). The Basics of Public Budgeting and Financial Management: A Handbook for Academics and Practitioners. Lanham,
Md.: University Press of America.
Seal, W. (2012). Management accounting. Maidenhead: McGraw-Hill Higher Education.
Siciliano, G. (2015). Finance for Nonfinancial Managers. New York: McGraw-Hill.