Stuart Daw Coffee

7/23/2019 Stuart Daw Coffee

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Case Synopsis

Stuarts Branded Foods, founded by Stuart Daw in 1962, was located in Toronto,

Canada, and mainly a business which roastin and sellin coffee! The "resident wanted to

focus on roastin and sellin "ac#aed coffee to customers li#e restaurants, hos"itals,

caterin truc#s and the li#e! These customers were in the $%way From &ome' coffee mar#et,

whereby they "urchased directly from roasters in a small (olume of coffee because it was

con(enient and ad(antaeous to them!

)o(in on, there were entre"reneurs who formed businesses to be a third man

between roasters and customers! These entre"reneurs "urchased a lare (olume of coffee

from roaster and re*"ac#aed into $#its'! The #it, which was e+ui(alent to -- cu"s of coffee,

was sold to small customers! The customers were also aided with e.tra ser(ices li#e rented

coffee brewin e+ui"ment, free maintenance of e+ui"ment, "ac#aed coffee ready for use,

and deli(ery to the customers location!

%s a coffee roaster, Stuarts Branded Foods o"erated its own roastin "lant! They

"urchased reen coffee needs throuh a local bro#er, basically the reen coffee beans were

from / e."ortin countries! The roastin "rocess in(ol(ed from loadin the reen coffee

beans into a roaster, heatin stae and to rindin stae where the beans were round intofiner "articles! 0n addition, most of the e+ui"ment used were aed more than - years! The

e+ui"ment was also said to be non*labour intensi(e! )oreo(er, durin the roastin and

rindin "rocess, an a""ro.imate 12 "er cent of the weiht of coffee disa""eared due to

moisture loss and this is called shrin#ae! Stuart Foods had estimated the cost of reen beans

for each "ound of roasted coffee "roduced since there was a shrin#ae issue and other

associated costs such as direct and indirect "roduction labour, "ac#ain materials and

de"reciation on e+ui"ment! These costs were 2!1 and -! "er "ound res"ecti(ely!

)oreo(er, the com"any had succeed in sellin almost 1 million worth of coffee and

handled in the rane of 13,--- in(oices! Their tareted "rofit marin was 14 of the sales

dollar and unfortunately, this tareted "rofit marin had not been attained, instead attained

"rofit marin of lower than 1-4 of sales, des"ite the a(erae sellin "rice of a 5#it had been

well in line with the industry a(erae! Furthermore, Stuarts Branded Foods was usin

traditional "ricin a""roach whereby the o"eratin cost chared were based on the allocation

of the sales and administration cost associated to the #its sold in the "re(ious year! The


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com"any chared o"eratin and e+ui"ment costs of 16!2- "er #it, considered 2, #its

were sold, and !2/ "er #it res"ecti(ely and mar#ed u" the "rice to earn desired "rofit!

Furthermore, Stuart Daw had distinuished its customer into two cateories, small

and lare customer! 7ormally, small customer, for instance a small office com"le. would

only ordered #its of coffee monthly, whereas larer customer, a restaurant in downtown

Toronto, would ha(e ordered 2- #its of coffee monthly! )oreo(er, the former ty"e of

customer was chared 222!-3 "er fi(e #it includin of 24 "rofit, while the latter was

chared !23 for 2- #its with only 124 "rofit!

Statement of Problem

%s a "resident of the com"any, Stuart Daw, as a decision ma#er will decide on his

com"any direction!Stuart Daw had +uestioned himself whether the com"any actually #nows

about the true unit cost! The e.istin costin a""roach "erha"s are not suitable to be used by

Stuart Daw! This could be "ortrayed as the ma8or concern or "roblem of the com"any and

which could be the reason why the com"any could not achie(e its 14 tareted return on

sales! 0n the case, the com"any was ado"tin traditional costin a""roach in which could be

rearded asunsuitable costin method and this could lead to inaccurate "ricin stratey! %ll

in all, Stuart Daw was concernin whether his com"any could attain 14 "rofit marin so

that the com"any would sustain in the industry!


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Diaram 1 0shi#awa Diaram

%s ma8or "roblem of the com"any was ina""ro"riate costin a""roach, therefore,

there are se(eral causes which lead to this "roblem! First of all, the "eo"le in the com"any

itself! Stuart Daw, as a "resident, should #now better about the costin and "ricin stratey as

he had e."erience in coffee industry! 0n this case, the com"any was seen as lac# of

information athered by its "eo"le, "lus lac# of e."ertise or com"etent "eo"le in the

com"any!

Furthermore, as stated in the case, the com"any was ado"tin traditional costin

a""roach whereby this a""roach only used one cost dri(er :the (olume "roduced;! The use of

only one cost dri(er could be deemed as less accurate in allocatin cost! For instance, the

(ehicle cost chared to the customer! The com"any di(ided the (ehicle cost o(er the number

of #its bein sold in which this method of calculatin was not "ro"er as the com"any miht

deli(er the order based on in(oices and in each in(oice miht ha(e different number of #its!

%s Stuart Daw was concern about the cost, he did not do ade+uate "lannin on how to

calculate the cost of coffee which could affect the final "rice chared to customer!


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%s e.ternal factor, the com"any had to com"ete with a broad rane of com"etitors

from iant roasters such as )a.well &ouse to local roasters who handled the mar#et! This

leads them to ha(e a stiff hih com"etition, in the "rice as well as the stratey, within the

coffee industry! 0n addition, the small customer tended to ta#e ad(antae o(er the roaster

whereby they "referred to "urchase coffee directly from roaster as this would cost them

lesser! %s mentioned in the case, the cost incurred to ser(e this ty"e of customer was hiher

than the "rofit enerated by this sale transaction!


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Cost driver Traditional Costing Activity-based Costing

No. of kits sold 27,777 kits

No. of invoices !,""" invoices

Cost of coffee "er #it --,--->2, ? 13!-- --,--->2, ? 13!--

@+ui"ment costs 9-,--->2, ? !2/ 9-,--->2, ? !2/

Aersonnel costs 22-,--->2, ? !92 22-,--->13,--- ? 12!22

ehicle costs -,--->2, ? 2!2 -,--->13,--- ? !39

2, ? 2!2 -,--->13,--- ? !39

Total cost #$%.2" #%.2%

Table 1.1

%s mentioned before, current "ractice within the Stuarts Branded Foods which

referrin to traditional costin, ha(e been usin the total number of #its "roduced as the main

cost dri(er! hereas, usin %cti(ity*based costin :%BC; could be the most suitable costin

a""roach in assinin a""ro"riate cost dri(er to each of the rele(ant costs incurred! 0ndeed,

the selection of cost dri(er of each acti(ity or "rocess where cost incurred is (ery crucial in

deri(in much more accurate result on cost*allocation on the "roduct! %ccordin to Blocher,

Stout, Co#ins Chen :2-1-;, the %BC can be defined as follows,

$!!!! used to improve the accuracy of cost analysis by improving the tracing of costs to

products or to individual customers.'

0n %BC, the suitable cost dri(er to be used for cost of coffee and e+ui"ment costremain the same as they were usin the number of #its sold! &owe(er, it is found that the

number of in(oices issued could be the most suitable cost dri(er for the other o"eratin costs

that includes "ersonnel costs, (ehicle costs as well as the other o(erhead costs! The reason

bein that, there is "ossibility that the number of #its ordered by the customer may (ary in the

sinle in(oice, yet, the deli(ery of the "roduct in the case of (ehicle could be lessen to a one*

time chare in corres"ondin to one in(oice assumin one in(oice re"resents one customer!

Similar case with the "ersonnel cost, there could be one in(oice handled by "ersonnel in


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which it is more a""ro"riate to be allocate as its cost dri(er rather than the number of #its that

merely inter"reted in a(erae cost "er #it!


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%cti(ity*based costin deemed to be the most a""ro"riate a""roach to be used in

im"ro(in the e.istin costin and "ricin a""roach used by Stuart Daw! This is because the

coffee "rocess undero s"ecific acti(ity to become the final out"ut! 0t is crucial to allocate the

true cost of coffee "er #its! By understandin the "rocess and the cost dri(er, the cost

allocation will be much more accurate! %s "resented in Table 1!1, with the e.istin costin,

Stuart actually chare lower to the customer while the actual cost were hiher! This shows

that with %BC, it i(es better "rofitability measure! 0n addition, im"lementation of %BC

hel"s to i(e better decision ma#in and im"ro(in the "rocess!

To im"lement %BC, firstly Stuart Daw should hire e."ertise in order to chane the

whole system! Then, a data collection should be made such as the "rocess, acti(ity, resource,

cost dri(er and cost ob8ect! This is the im"ortant element that are needed to im"lement %BC!

By chanin the costin, it re+uires "artici"ation and acce"tance by the whole manaement

includin from to" manaement until lower manaement! Thus, it will ta#e time but with

encouraement from the to" manaement, it miht be "ossible to im"lement the new costin

system!

0n a nutshell, after analy=in the case, the ma8or "roblem that are faced by Stuart Daw

is the costin and "ricin a""roach where they use the traditional a""roach! This resultin to

inaccurate costin! %lternati(es that are a(ailable to them are status +uo and %BC! By

im"lementin %BC, they can ha(e more accurate costin a""roach and better "rofitability

analysis! &owe(er, im"lementin %BC re+uires cost and ta#es time! 0n addition, it needs

coo"eration from manaement!


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eferences

Blocher, @!G, Stout, D!@, Co#ins, H Chen, I!& :2-1-; Cost )anaement % Strateic

@m"hasis :th! @d!;, 7ew Jor# )cHraw &ill!

@dwards, S :2--3;!Activity Based Costing To"ic Hateway Series 7o! 1Ke*boo#L! etrie(ed

fromhtt">>www!cimalobal!com>Documents>0m"ortedDocuments>cidMtMacti(ityMbasedMcostinM

no(-3!"df!"df

Gamie >www!8amieoli(er!com>reci"es>member*reci"es>reci"e*

detail>1962>OdEDJ@PosmF#mIb!9

Coffee :Fairtrade 0nternational >Aroduct;!

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