Problem
Johnson Associates is a catering firm in Tucson, Arizona, with revenue of $4 million. The business began ten years ago as a one-owner bakery, but has dramatically changed in size and function during the past five years. The four partners foresee the business doubling in sales revenue within two years. They expect the firm to expand into other services including flowers, furnishings, decorations, and music.
Johnson Associates employs six full-time and ten part-time employees. The four partners also work full-time, each partner managing a separate business function. The firm currently uses a Volume-Based Costing system installed seven years ago and modified three years later.
With the help of the above information, answer the questions that follow:
• Are you of the opinion firms like Johnson Associates, producing and selling large quantities of relatively few products would have no need for an ABC system? Why or why not?
• Do you think an ABC system is usually more expensive to implement than a Volume-Based Costing system. Give reasons to substantiate your response.
• On the basis of your judgment, express whether Johnson Associates is a viable candidate for an ABC system? If yes, why do you feel so, and if no, what makes you feel that way?
• How can the activity rates (i.e. cost per activity) for the various activities be used to target process improvements for Johnson Associates?