Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 53

Role of Activity-Based Costing in Implementing Strategy Laurent Products is a manufacturer of plastic packaging products with plants located throughout Europe and customers worldwide. During the past 10 years Laurent Products has successfully developed a line of packaging materials and a unique bagging system that present an important opportunity to increase the productivity of checkout counters in grocery stores. The plastic bags manufactured by Laurent are produced in several sizes and different plastic film colors and may have attractive multicolor printed designs on one or both sides to meet the specification of a particular grocery store. The advantages provided by the Laurent bagging system include the lower cost of bags and labor at the checkout counter as well as improved customer service. The system has contributed to a significant growth in Laurent’s sales in recent years.

Laurent’s success in the grocery chain market has attracted an increasing number of competitors into the market. While the company had been very successful in bringing out a series of new product types with innovative labor-saving features for the grocery stores, the competitors have eventually been able to develop quite similar products. The result has been increased competition with a substantial reduction in Laurent’s prices.

As a result of the increased competition in the grocery chain market, Laurent is planning to begin to focus on the small independent grocery stores that purchase bags from large wholesale distributors. The potential sales for this wholesaler segment is about the same size as the grocery chain market but includes a much larger number of independent store customers.

Investments in manufacturing equipment in recent years have been to support two principal objectives: to increase capacity and to reduce costs. The cost reduction initiatives principally concerned material costs and reduced processing times. Over the years Laurent has chosen to invest in machines that are similar to existing equipment in order to capitalize on the fact that the process is relatively simple and that products can, with relatively few exceptions, be processed on any machine in the plant. The only major restriction is the number of colors that a machine can accommodate on a single pass. Future investment proposals now being considered are based on this rationale.

Required What are the key strategic issues facing Laurent, and how can ABC costing assist in resolving these issues?

Step 1 of 3

Activity Based costing:

Activity based costing is a method of allocating overhead cost based on the cost drivers that directly affect the activity of the cost. These cost drivers are directly related to the activity and hence, provide the better results and using a single cost driver.