Case Notes/Answers
Colorscope, Inc. (Abridged) by V.G. Narayanan
Discussion Questions:
1. Set up a two stage cost system to figure out the profitability of different jobs. You will have to
choose resource drivers to allocate the cost of resources to cost pools. Then choose cost drivers to
allocate the costs in various cost pools to jobs. Compute the cost driver rates. Calculate profitability of
all jobs by allocating costs to that job using the cost-driver rates that you estimated. It might be useful
to diagram this system before you start calculating the cost pools and cost driver rates.
2. Assignment question 1 is a "full-cost" analysis. Is full cost the right metric for job profitability or
should Colorscope only allocate direct costs to jobs? What assumptions are we making about the
variability of overhead costs when we do a "full-cost" analysis.
3. What is the financial consequence of rework? What should Colorscope do about rework? How?
4. Should Colorscope do anything about its incentive system?
5. How can Colorscope improve its operations and profitability?
, 5-113-108
FEBRUARY 26, 2013
T E AC H I N G N O T E
Colorscope, Inc. (Abridged)
Colorscope is a very small company in the pre-press business. As the prices of computers keep
falling, so does the entry barrier in this industry. Colorscope is operating on wafer-thin margins and
prices are getting squeezed. Prices have dropped in half over the last five years. Colorscope is the
quality leader in the industry but Colorscope has to cut costs, eliminate waste, drum-up new
business, and find a way to differentiate itself.
The case presents a wealth of numerical information that the students can analyze. The analysis
tells the students why Colorscope is barely breaking even. The students will discover the costs of
excess capacity and reworks. They can use this analysis and the information about the industry to
suggest process improvements, pricing changes, and incentive changes. These changes could
potentially save Colorscope a lot of money and cut turnaround time, making Colorscope much more
competitive.
From a cost-accounting point-of-view the case is about job costing in a two-stage cost allocation
process. In the first stage, costs are assigned from resources to production centers. In the second
stage costs are allocated from production centers to jobs and customers. Cost of excess capacity at the
resource level and production center level are considered. More importantly, this case demonstrates
a shift from aggregate data collection to costing of jobs.
Colorscope works very well as an introductory case for a module on cost accounting. If used as
an introductory case, technical terms, which are presented in italics in this note, can be written on a
separate board. These terms can then be used consistently through the module.
Assignment Questions
1. Set up a two stage cost system to figure out the profitability of different jobs. You will have to
choose resource drivers to allocate the cost of resources to cost pools. Then choose cost drivers
to allocate the costs in various cost pools to jobs. Compute the cost driver rates. Calculate
profitability of all jobs by allocating costs to that job using the cost-driver rates that you
estimated. It might be useful to diagram this system before you start calculating the cost pools
and cost driver rates.
Colorscope, Inc. (Abridged) by V.G. Narayanan
Discussion Questions:
1. Set up a two stage cost system to figure out the profitability of different jobs. You will have to
choose resource drivers to allocate the cost of resources to cost pools. Then choose cost drivers to
allocate the costs in various cost pools to jobs. Compute the cost driver rates. Calculate profitability of
all jobs by allocating costs to that job using the cost-driver rates that you estimated. It might be useful
to diagram this system before you start calculating the cost pools and cost driver rates.
2. Assignment question 1 is a "full-cost" analysis. Is full cost the right metric for job profitability or
should Colorscope only allocate direct costs to jobs? What assumptions are we making about the
variability of overhead costs when we do a "full-cost" analysis.
3. What is the financial consequence of rework? What should Colorscope do about rework? How?
4. Should Colorscope do anything about its incentive system?
5. How can Colorscope improve its operations and profitability?
, 5-113-108
FEBRUARY 26, 2013
T E AC H I N G N O T E
Colorscope, Inc. (Abridged)
Colorscope is a very small company in the pre-press business. As the prices of computers keep
falling, so does the entry barrier in this industry. Colorscope is operating on wafer-thin margins and
prices are getting squeezed. Prices have dropped in half over the last five years. Colorscope is the
quality leader in the industry but Colorscope has to cut costs, eliminate waste, drum-up new
business, and find a way to differentiate itself.
The case presents a wealth of numerical information that the students can analyze. The analysis
tells the students why Colorscope is barely breaking even. The students will discover the costs of
excess capacity and reworks. They can use this analysis and the information about the industry to
suggest process improvements, pricing changes, and incentive changes. These changes could
potentially save Colorscope a lot of money and cut turnaround time, making Colorscope much more
competitive.
From a cost-accounting point-of-view the case is about job costing in a two-stage cost allocation
process. In the first stage, costs are assigned from resources to production centers. In the second
stage costs are allocated from production centers to jobs and customers. Cost of excess capacity at the
resource level and production center level are considered. More importantly, this case demonstrates
a shift from aggregate data collection to costing of jobs.
Colorscope works very well as an introductory case for a module on cost accounting. If used as
an introductory case, technical terms, which are presented in italics in this note, can be written on a
separate board. These terms can then be used consistently through the module.
Assignment Questions
1. Set up a two stage cost system to figure out the profitability of different jobs. You will have to
choose resource drivers to allocate the cost of resources to cost pools. Then choose cost drivers
to allocate the costs in various cost pools to jobs. Compute the cost driver rates. Calculate
profitability of all jobs by allocating costs to that job using the cost-driver rates that you
estimated. It might be useful to diagram this system before you start calculating the cost pools
and cost driver rates.
