Product Costing Using Activity-Based Costing and Just-in-Time: A Value Chain Approach
Wearwell Carpet Company is a small residential carpet manufacturer started by Don Stegall, a longtime engineer, and manager in the carpet industry. Stegall began Wearwell in the early 1990s after learning about ABC, JIT, total quality management, and several other manufacturing concepts being used successfully in Japan and other parts of the world. Although it was a small company, he believed that with his many years of experience and by applying these advanced techniques, Wearwell could very quickly become a world-class competitor.
Stegall buys dyed carpet yarns for Wearwell from three different major yarn manufacturers with which he has done business for many years. He chose these companies because of their reputation for producing high-quality products and their state-of-the-art research and development departments. He has arranged for two carpet manufacturing companies to produce (tuft) all of his carpets on a contractual basis. Both companies have their own brands, but they also do contract work for other companies. For each manufacturer, Stegall had to agree to use the full output of one manufacturing production line at least one day per month. Each production line was dedicated to producing only one style of carpet, but each manufacturer had production lines capable of running each type of carpet that Wearwell sold.
Stegall signed a contract with a large transport company (CTC), which specializes in carpet-related shipping, to pick up and deliver yarn from the yarn plants to the tufting mills. This company will then deliver the ﬁnished product from the tufting mills to Wearwell’s ten customers, which are carpet retailers in the ten largest residential building markets in the country. These retailers pay the shipping charges to have the carpets delivered to them. Wearwell maintains a small sales staff (which also doubles as a customer service staff) to deal with the retailers and occasionally with the end customers on quality problems that arise.
Wearwell started selling only one line of carpet, a medium-grade plush, but as new carpet styles were developed, it added two additional lines, a medium-grade berber carpet, and a medium-grade textured carpet. Three colors are offered in each carpet style. By selling only medium grades with limited color choices, Stegall felt that he would reach a very large segment of the carpet market without having to deal with a large number of different products. As textured (trackless) carpets have become more popular, sales of plush have diminished substantially.
- 1. Describe the value chain for Wearwell Carpet Company, and identify the parties who compose this value chain.
- 2. Identify and discuss the cost categories that would be included in the cost of the product for ﬁnancial reporting purposes.
- 3. Identify and discuss the cost categories that would be included in the cost of the product for pricing and other management purposes.
- 4. Discuss some of the challenges that Stegall will have trying to apply JIT to regulate the levels of control at Wearwell. Suggest changes that might be necessary to make JIT work.
- 5. Does Wearwell seem to be an appropriate setting for implementing ABC? If so, what are likely to be the most important activities and related cost drivers