CASE: BRIDGE PORT

COLORSCOPE, INC

Saddam Roberto Binu

NIM : 01044821719001

Dosen Pengajar:
Mukhtaruddin, SE., M.Si., Ak.,CA

Program Pendidikan Profesi Akuntansi

Universitas Sriwijaya
2017
I. Introduction:

Andrew Cha, who is a specialist in graphics designing, started his own company after
years of hard work and through experience gained by working with different
companies; he established the firm with the name of Colorscope in 1976. Colorscope
has different portfolio of customer ranging from impulse customers to long-term loyal
customers, the amount of loyal customers comprise 80% of the total customers of the
company.

The operational process at Colorscope started from receiving orders of customers;

these orders were mostly related to magazines and some other sort art and graphics
work. All the specifications and design requirements were recorded on phone calls
and then the person who was entitled to record the task did the preparation; this
involved the creation of templates by physically cutting and pasting text, graphics and
photographs, and special effects were also included at an additional cost. Then in the
next step of the production process, template pictures were digitalized and scanned.
Further the task was sent to the assembly division where operator changed the color
and shade of scanned images as per the specifications of the customer. Then the task
was finally sent for quality control to the Quality Control (QC) Department and if the
task was not as per the specifications of the customer; it was sent back to that specific
process for reworking which meant that all the following processes had to be repeated
for that specific task. Once passed from the QC Department; the task was completed.

II. Problem Statement

Colorscope is facing difficulties in retaining its customers partly because of the

quality of their work and due to the prices charged to customers along with the
absence of some sort of internal controls.

III. Analysis

Work Flow at Colorscope:

The work flow started at Colorscope from receiving orders on phone calls and then
recording the specifications that might cause some data to be misinterpreted or
erroneously recorded which caused reworking on the task, so that it was fully
completed and returned to the QC Department. Since the receiving and recording of
the task was the first stage of work; hence if there was any mistake at this stage then
the entire process had to be repeated in order to rework the task. In the next stage of
the process, templates of picture were created by physically cutting and pasting the
graphs, images and text.

The scanning process was done using three laser scanners and the task was sent to the
assembly department once the scanning process was completed. The assembly was
done using the old fashioned and obsolete technology, which resulted in inferior
quality of output and increased cost. New technology should be brought in to remain
competitive in the printing industry and monitoring of work should be carried out to
suggest the improvements needed.

Pricing Strategy:
 Costs of work done at each process of the given task has to be analyzed and costing
system such as activity based cost should be used while allocating the overhead cost
such as rent cost to each process. Activity/capacity responsible for incurring the cost
(cost driver) should be used to allocate the cost between each process. Since rent
expenses directly relates to floor space hence; it would be reasonable to allocate rent
on the basis of floor area occupied by each department.

Cost per task needs to be calculated as per Appendix-A based on activity based
costing, and loss-making tasks should be evaluated further. In this evaluation, cost
incurred as a result of in-house error and cost associated with idle time and space
should not be considered as these are abnormal losses. New technology should be
brought in to minimize the depreciation cost due to the use of old equipments.

This is noted as part of the job costing process that almost all the loss-making tasks
have been reworked either due to changes in customer specifications or in-house
errors; this should be evaluated that what is the policy of additional charges on rework
requested by customer and the customer should be told in advance that later changes
in work will require additional cost to be paid. Frequency of reworking tasks should
be minimized. As per the Appendix-B, 8% of the jobs were reworked during June
1996 regarding the task preparation process and 15% in respect to rest of the three
processes.

Accounting and Control System:

Activity based costing can be used as an accounting system for arriving at the base
price of each task done by justifying the work against cost consumed by each process.
So that each process is evaluated against its performance and cost consumed.

Control system should be in place for proper and smooth operations at all the stages of
production processes. The work flow at the Colorscope is well standardized but it is
not documented. It should be documented and communicated at all levels of
production processes hence; there is no point in deviating from the standard
procedures. Customer specifications should also be sent to each production process so
that it is matched with the work completed at each step that will again help in
minimizing the chances of rework.

Since all the staff is cross-trained and can perform the activities of the entire process
involved without the need of any additional training hence; at every stage the task
should go through a quality control process before it is forwarded to the next level,
this will help in minimizing the chances of rework suggested by the quality control
division at the final stage.

As part of the internal control system, supervisory controls should be introduced at all
stages of processes in order to assess the performance of each individual and
processes involved in the completion of a task, and based on that supervision
corrective actions should be implemented.

IV. Conclusion:
 Based on above analysis, operations of Colorscope should be documented and well
communicated regarding all the processes, and customer specifications should also be
communicated to staff at all stages in writing so that reworking of tasks can be
avoided. In addition, new technology should be brought in to enhance the quality of
output and to minimize..

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Small company in the graphic arts business faces stiff competition in prices. The
company should be responsible for reducing costs and improving the process of
adoption.

Introduction

Color scope, Inc. formed in 1976 by a China Immigrant to USA named Andrew Cha. Colors
cope initially serves local agencies of advertising with special effects and its reputation
increased in photography with special effects within fey years. With the passage of times its
sales and revenues increased significantly.

Enhancement in technology results in the larger number of small and big competitors forced
Color scope to cut down its prices. It is expected that this trend of price war will continue and
will result in further decrease of prices.

Therefore Cha decided to analyze the market deeply and is expecting to rebuild the processes
of its business like its operations and the strategies related to the pricing decisions.

Profitability of different Jobs

Cha is expecting to analyze its products with two stage costing system. There are many
number of jobs performed by the Cha. Its revenues and associated costs, cost pools and their
drivers are present in the exhibits. With the help of the data it is clear that five cost pools are
present in the cost structure of the company.

In order to calculate relevant profit per job it is necessary that the all cost are allocated
according to the activities performed by the specific pool. First of all cost pools are identified
which are job preparation, scanning, assembly, output and quality control. The second step is
to identify the relevant cost drivers which are associated with specific cost pool.

Like Floor space in square feet is the stager driver of the depreciation cost Depreciation cost
is allocated to each cost pool on the basis of this cost driver. In two stage costing system
firstly costs are allocated to the resources then in second step these cost are allocated to the
cost pools according to the suitable stage driver.

In this scenario firstly cost are allocated according to the resources then in second stage these
costs are allocated to the cost pools according to the suitable stage driver. Like the other
variable overheads are firstly allocated to the resources on the basis of floor space per square
feet then in second stage driver these costs are allocated to specific cost pools on the basis of
labor hours worked.

In this all overheads are allocated to each cost pool to identify the profit per job. For this
purpose revenue and material cost per job is given. With the help of two stage costing system
overheads are assigned to each of the five cost pools according to the specific cost driver.

After assigning the overheads to each cost pool total cost of each job is identified by adding
the material cost wage cost and other overheads like rent and depreciation. By subtracting the
revenue of each job with the total cost profit per job is identified. Profit for each job is
different according to the number of activities.

The cost pool with greater number of activities assigned with the greater amount of overhead
cost. Greater allocation of overhead cost results in loss of certain jobs like job 605, It
incurring revenue of 50,000 but allocation of greater overheads due to the greater number of
labor hours results in the loss on this job.

Full Cost method

Full cost method identifies the cost of each component according to the activities performed
by that component. With the help of the full cost method appropriate cost related to a specific
cost pool is identified, therefore it gives more clearly and insight view of the cost structure of
that component and helps in better decision making.

On the other hand direct cost method assigns cost to cost pools on the basis of number of
units produced or sale and number of labor hours, it ignore the other basis and activities
performed by different cost pools.

Cost estimates produced on such basis didnt provide the more clear and insight figure of the
cost structure of that component and cost pool, Therefore it leads to the wrong decision
making when allocating budgets or in decision making processes. Thus full cost method is far
better costing method than the direct cost method..