Question

The Doha Camping Company Case Doha Camping Company is a manufacturer of tents and camping accessories. The company's Doha plant manufactures three product lines, each of which produces a brand of tent. These brands are the Sahara Standard (STD), the Deluxe (DEL), and the Ultimate (ULT). Until recently, Doha Camping Company's Doha plant used a job-order product-costing system. The cost of each product was the sum of its actual direct material cost, actual direct labor cost, and applied manufacturing overhead as follows: Exhibit (1) Product price STD Tent DEL Tent ULT Tent Target selling price $595.20 $724.80 $902.40 Actual selling price $585.00 $705.00 $940.00 Overhead was applied using a predetermined overhead rate based on direct labor hours. By using the traditional system, all of the Doha plant's budgeted manufacturing overhead costs are lumped together in a single cost pool. This total budgeted overhead amount is $4,896,000 assigned to STD, DEL & ULT based on labor hours. Trouble in Doha Camping Company The operation and profitability of Doha Camping Company have been facing many challenges in recent years. The company's pricing policy sets a target price for each tent equal to 120% of the full product cost. However, the actual prices used for these products are not consistent with the pricing policy (120% of full cost). The following table compares the actual selling price used with the targeted selling price: Products STD Tent DEL Tent ULT Tent Cost items Planned annual production (Units) 10,000 8,000 2,000 Raw material cost per unit $100 $120 $180 Labor wage rate per hour $20 $20 $20 Labor hours required per unit 9 hours 11 hours 13 hours Due to price competition from other tent manufacturers, Sahara (STD) Tents were selling at $585, approximately $10 below their target price of $595.20. Moreover, Doha Camping Company's competition had forced management to reduce the price of the DEL Tent to $705, almost $20 below its target price of $724.80. Even at this lower price, the sales team was having difficulty in getting orders for its planned volume of DEL Tent production. Fortunately, the disappointing profitability of STD and DEL model Tents was partially offset by the greater-than-expected profits from the ULT line of Tents. Doha Camping Company's sales personnel had discovered that the company was swamped with orders when the Ultimate Tent's target price of $902.40 was charged. Consequently, management had raised the price on the ULT Tent several times, and eventually, the product price ended up being $940. Even at this price, Doha Camping Company's customers did not seem to hesitate to place orders. Moreover, the company's competitors did not mount a challenge in the market for the ULT line of Tents. Doha Camping Company's management was pleased to have a niche for the ULT Tent market, which appeared to be a highly profitable, low-volume specialty product. Nevertheless, concern continued to mount in Doha about the difficulty in the Sahara STD and DEL Tent markets. After all, these were the Doha plant's bread-and-butter products, with projected annual sales of 10,000 STD Tents, 8,000 DEL Tents, and 2,000 ULT Tents. New costing system and data collection Doha Camping Company's director of cost management, Hamilton Burger, had been thinking for some time about a refinement on the Doha plant's product-costing system. He wondered how the traditional, volume-based system was providing management with accurate data about product costs. Burger had read about Activity-Based Costing (ABC) systems, which follow a two-stage procedure to assign overhead costs to products. Doha Camping Company had formed a team for collecting data for the ABC system. In the first stage, the team identified significant activities in the production of the three products and assigned overhead costs to each activity in accordance with the cost of the organization's resources of activity cost pools. In stage two of the activity-based costing project, the team identified cost drivers for each activity cost pool that have been used for Doha Camping Company's three product lines as shown in the following exhibit: Exhibit (3) Activity Cost Pool Activity Measure Total Cost STD DEL ULT Total Activity Machinery Machine hours $1,242,000 100,000 96,000 34,000 230,000 Set-up Production runs $210,000 80 80 40 200 Purchasing Purchase orders $300,000 200 192 208 600 Material-Handling Production runs $340,000 80 80 40 200 Quality-Assurance Inspection hours $110,000 800 800 600 2,200 Packing/Shipping Shipments $264,000 1,000 800 400 2,200 Engineering Design Engineering hours $130,000 500 400 400 1,300 Facility Machine hours $2,300,000 100,000 96,000 34,000 230,000 ABC-based customer profitability analysis Two more years have passed, and the company has successfully implemented its activity-based costing system in its Doha plant. At a recent strategy meeting with their senior company management team, Doha Camping Company's president and CEO expressed interest in assessing the profitability of the entire company's various customer relationships. They found support for the idea from the director of cost management, who had been reading about customer-profitability analysis in some of his professional journals. The company's marketing manager also expressed interest in customer profitability analysis, since he has concerned about the profitability of a couple of Doha Camping Company's customers in particular. "We have a few customers who seem to want the moon and the stars when it comes to customer service," he complained. "I know the customer is always right and all, but you really have to wonder if we're making any money from a couple of these customers, what with all the extra design and packaging they demand. And some of the other customers seem to require an awful lot of extra attention to sales calls, order processing, and billing. If we had a better idea of each customer's profitability, it would help our marketing and sales staff to focus their efforts." The controller soon had his cost management staff attacking the customer-profitability analysis that the president had requested. The first step required an activity-based costing analysis of certain customer-related costs that could seriously affect a customer's profitability. Recall that ABC analysis relies on a cost hierarchy with cost levels, such as unit-level, batch-level, product-line-level, customer-level, and facility or general operations-level costs. In this use of activity-based costing, the cost management team is focusing on the customer-related costs. After an extensive analysis and several interviews with personnel throughout Doha Camping Company, the cost management team came up with the ABC analysis in the following table: Based on the activity-based costing information, the cost management team assessed the profitability of each of Doha Camping Company's customer relationships. Detailed information from that analysis for five of these customers appears in the following table:

The Doha Camping Company Case

Doha Camping Company is a manufacturer of tents and camping accessories. The company's Doha plant manufactures three product lines, each of which produces a brand of tent. These brands are the Sahara Standard (STD), the Deluxe (DEL), and the Ultimate (ULT). Until recently, Doha Camping Company's Doha plant used a job-order product-costing system. The cost of each product was the sum of its actual direct material cost, actual direct labor cost, and applied manufacturing overhead as follows:

Exhibit (1)
Product price
STD Tent
DEL Tent
ULT Tent
Target selling price
$595.20
$724.80
$902.40
Actual selling price
$585.00
$705.00
$940.00

Overhead was applied using a predetermined overhead rate based on direct labor hours. By using the traditional system, all of the Doha plant's budgeted manufacturing overhead costs are lumped together in a single cost pool. This total budgeted overhead amount is $4,896,000 assigned to STD, DEL & ULT based on labor hours.

Trouble in Doha Camping Company

The operation and profitability of Doha Camping Company have been facing many challenges in recent years. The company's pricing policy sets a target price for each tent equal to 120% of the full product cost. However, the actual prices used for these products are not consistent with the pricing policy (120% of full cost). The following table compares the actual selling price used with the targeted selling price:

Products
STD Tent
DEL Tent
ULT Tent
Cost items
Planned annual production (Units)
10,000
8,000
2,000
Raw material cost per unit
$100
$120
$180
Labor wage rate per hour
$20
$20
$20
Labor hours required per unit
9 hours
11 hours
13 hours

Due to price competition from other tent manufacturers, Sahara (STD) Tents were selling at $585, approximately $10 below their target price of $595.20. Moreover, Doha Camping Company's competition had forced management to reduce the price of the DEL Tent to $705, almost $20 below its target price of $724.80. Even at this lower price, the sales team was having difficulty in getting orders for its planned volume of DEL Tent production. Fortunately, the disappointing profitability of STD and DEL model Tents was partially offset by the greater-than-expected profits from the ULT line of Tents.

Doha Camping Company's sales personnel had discovered that the company was swamped with orders when the Ultimate Tent's target price of $902.40 was charged. Consequently, management had raised the price on the ULT Tent several times, and eventually, the product price ended up being $940. Even at this price, Doha Camping Company's customers did not seem to hesitate to place orders. Moreover, the company's competitors did not mount a challenge in the market for the ULT line of Tents. Doha Camping Company's management was pleased to have a niche for the ULT Tent market, which appeared to be a highly profitable, low-volume specialty product. Nevertheless, concern continued to mount in Doha about the difficulty in the Sahara STD and DEL Tent markets. After all, these were the Doha plant's bread-and-butter products, with projected annual sales of 10,000 STD Tents, 8,000 DEL Tents, and 2,000 ULT Tents.

New costing system and data collection

Doha Camping Company's director of cost management, Hamilton Burger, had been thinking for some time about a refinement on the Doha plant's product-costing system. He wondered how the traditional, volume-based system was providing management with accurate data about product costs. Burger had read about Activity-Based Costing (ABC) systems, which follow a two-stage procedure to assign overhead costs to products.

Doha Camping Company had formed a team for collecting data for the ABC system. In the first stage, the team identified significant activities in the production of the three products and assigned overhead costs to each activity in accordance with the cost of the organization's resources of activity cost pools. In stage two of the activity-based costing project, the team identified cost drivers for each activity cost pool that have been used for Doha Camping Company's three product lines as shown in the following exhibit:

Exhibit (3)
Activity Cost Pool
Activity Measure
Total Cost
STD
DEL
ULT
Total Activity
Machinery
Machine hours
$1,242,000
100,000
96,000
34,000
230,000
Set-up
Production runs
$210,000
80
80
40
200
Purchasing
Purchase orders
$300,000
200
192
208
600
Material-Handling
Production runs
$340,000
80
80
40
200
Quality-Assurance
Inspection hours
$110,000
800
800
600
2,200
Packing/Shipping
Shipments
$264,000
1,000
800
400
2,200
Engineering Design
Engineering hours
$130,000
500
400
400
1,300
Facility
Machine hours
$2,300,000
100,000
96,000
34,000
230,000

ABC-based customer profitability analysis

Two more years have passed, and the company has successfully implemented its activity-based costing system in its Doha plant. At a recent strategy meeting with their senior company management team, Doha Camping Company's president and CEO expressed interest in assessing the profitability of the entire company's various customer relationships. They found support for the idea from the director of cost management, who had been reading about customer-profitability analysis in some of his professional journals. The company's marketing manager also expressed interest in customer profitability analysis, since he has concerned about the profitability of a couple of Doha Camping Company's customers in particular. "We have a few customers who seem to want the moon and the stars when it comes to customer service," he complained. "I know the customer is always right and all, but you really have to wonder if we're making any money from a couple of these customers, what with all the extra design and packaging they demand. And some of the other customers seem to require an awful lot of extra attention to sales calls, order processing, and billing. If we had a better idea of each customer's profitability, it would help our marketing and sales staff to focus their efforts."

The controller soon had his cost management staff attacking the customer-profitability analysis that the president had requested. The first step required an activity-based costing analysis of certain customer-related costs that could seriously affect a customer's profitability. Recall that ABC analysis relies on a cost hierarchy with cost levels, such as unit-level, batch-level, product-line-level, customer-level, and facility or general operations-level costs. In this use of activity-based costing, the cost management team is focusing on the customer-related costs. After an extensive analysis and several interviews with personnel throughout Doha Camping Company, the cost management team came up with the ABC analysis in the following table:

Based on the activity-based costing information, the cost management team assessed the profitability of each of Doha Camping Company's customer relationships. Detailed information from that analysis for five of these customers appears in the following table:

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The Doha Camping Company Case Doha Camping Company is a manufacturer of tents and camping accessories. The company's Doha plant manufactures three product lines, each of which produces a brand of tent. These brands are the Sahara Standard (STD), the Deluxe (DEL), and the Ultimate (ULT). Until recently, Doha Camping Company's Doha plant used a job-order product-costing system. The cost of each product was the sum of its actual direct material cost, actual direct labor cost, and applied manufacturing overhead as follows: Exhibit (1) Product price STD Tent DEL Tent ULT Tent Target selling price $595.20 $724.80 $902.40 Actual selling price $585.00 $705.00 $940.00 Overhead was applied using a predetermined overhead rate based on direct labor hours. By using the traditional system, all of the Doha plant's budgeted manufacturing overhead costs are lumped together in a single cost pool. This total budgeted overhead amount is $4,896,000 assigned to STD, DEL & ULT based on labor hours. Trouble in Doha Camping Company The operation and profitability of Doha Camping Company have been facing many challenges in recent years. The company's pricing policy sets a target price for each tent equal to 120% of the full product cost. However, the actual prices used for these products are not consistent with the pricing policy (120% of full cost). The following table compares the actual selling price used with the targeted selling price: Products STD Tent DEL Tent ULT Tent Cost items Planned annual production (Units) 10,000 8,000 2,000 Raw material cost per unit $100 $120 $180 Labor wage rate per hour $20 $20 $20 Labor hours required per unit 9 hours 11 hours 13 hours Due to price competition from other tent manufacturers, Sahara (STD) Tents were selling at $585, approximately $10 below their target price of $595.20. Moreover, Doha Camping Company's competition had forced management to reduce the price of the DEL Tent to $705, almost $20 below its target price of $724.80. Even at this lower price, the sales team was having difficulty in getting orders for its planned volume of DEL Tent production. Fortunately, the disappointing profitability of STD and DEL model Tents was partially offset by the greater-than-expected profits from the ULT line of Tents. Doha Camping Company's sales personnel had discovered that the company was swamped with orders when the Ultimate Tent's target price of $902.40 was charged. Consequently, management had raised the price on the ULT Tent several times, and eventually, the product price ended up being $940. Even at this price, Doha Camping Company's customers did not seem to hesitate to place orders. Moreover, the company's competitors did not mount a challenge in the market for the ULT line of Tents. Doha Camping Company's management was pleased to have a niche for the ULT Tent market, which appeared to be a highly profitable, low-volume specialty product. Nevertheless, concern continued to mount in Doha about the difficulty in the Sahara STD and DEL Tent markets. After all, these were the Doha plant's bread-and-butter products, with projected annual sales of 10,000 STD Tents, 8,000 DEL Tents, and 2,000 ULT Tents. New costing system and data collection Doha Camping Company's director of cost management, Hamilton Burger, had been thinking for some time about a refinement on the Doha plant's product-costing system. He wondered how the traditional, volume-based system was providing management with accurate data about product costs. Burger had read about Activity-Based Costing (ABC) systems, which follow a two-stage procedure to assign overhead costs to products. Doha Camping Company had formed a team for collecting data for the ABC system. In the first stage, the team identified significant activities in the production of the three products and assigned overhead costs to each activity in accordance with the cost of the organization's resources of activity cost pools. In stage two of the activity-based costing project, the team identified cost drivers for each activity cost pool that have been used for Doha Camping Company's three product lines as shown in the following exhibit: Exhibit (3) Activity Cost Pool Activity Measure Total Cost STD DEL ULT Total Activity Machinery Machine hours $1,242,000 100,000 96,000 34,000 230,000 Set-up Production runs $210,000 80 80 40 200 Purchasing Purchase orders $300,000 200 192 208 600 Material-Handling Production runs $340,000 80 80 40 200 Quality-Assurance Inspection hours $110,000 800 800 600 2,200 Packing/Shipping Shipments $264,000 1,000 800 400 2,200 Engineering Design Engineering hours $130,000 500 400 400 1,300 Facility Machine hours $2,300,000 100,000 96,000 34,000 230,000 ABC-based customer profitability analysis Two more years have passed, and the company has successfully implemented its activity-based costing system in its Doha plant. At a recent strategy meeting with their senior company management team, Doha Camping Company's president and CEO expressed interest in assessing the profitability of the entire company's various customer relationships. They found support for the idea from the director of cost management, who had been reading about customer-profitability analysis in some of his professional journals. The company's marketing manager also expressed interest in customer profitability analysis, since he has concerned about the profitability of a couple of Doha Camping Company's customers in particular. "We have a few customers who seem to want the moon and the stars when it comes to customer service," he complained. "I know the customer is always right and all, but you really have to wonder if we're making any money from a couple of these customers, what with all the extra design and packaging they demand. And some of the other customers seem to require an awful lot of extra attention to sales calls, order processing, and billing. If we had a better idea of each customer's profitability, it would help our marketing and sales staff to focus their efforts." The controller soon had his cost management staff attacking the customer-profitability analysis that the president had requested. The first step required an activity-based costing analysis of certain customer-related costs that could seriously affect a customer's profitability. Recall that ABC analysis relies on a cost hierarchy with cost levels, such as unit-level, batch-level, product-line-level, customer-level, and facility or general operations-level costs. In this use of activity-based costing, the cost management team is focusing on the customer-related costs. After an extensive analysis and several interviews with personnel throughout Doha Camping Company, the cost management team came up with the ABC analysis in the following table: Based on the activity-based costing information, the cost management team assessed the profitability of each of Doha Camping Company's customer relationships. Detailed information from that analysis for five of these customers appears in the following table: