Problem:
Family Supermarkets (FS) operates at capacity and decides to apply ABC analysis to three product lines: baked goods, milk and fruit juice, and frozen foods.
It identifies four activities and their activity cost rates as:
| Ordering |
|
|
|
$100 |
per purchase order |
| Delivery and receipt of merchandise |
$80 |
per delivery |
| Shelf-stocking |
|
|
$20 |
per hour |
| Customer support and assistance |
$0.20 |
per item sold |
The revenues, cost of goods sold, store support costs, and activity-area usage of the three product lines are:
| |
|
|
|
Baked Goods |
Milk & Fruit Juice |
Frozen Products |
| Financial data |
|
|
|
|
|
|
Revenues |
|
$57,000 |
$63,000 |
$52,000 |
|
Cost of goods sold |
|
$38,000 |
$47,000 |
$35,000 |
|
Store support |
|
$11,400 |
$14,100 |
$10,500 |
| Activity-area usage |
|
|
|
|
|
| (cost allocation base) |
|
|
|
|
|
Ordering (purchase orders) |
30 |
25 |
13 |
|
Delivery (deliveries) |
98 |
36 |
28 |
|
Shelf-stocking (hours) |
183 |
166 |
24 |
|
Customer support (items sold) |
15,500 |
20,500 |
7,900 |
Under its simple costing system, FS allocated support costs to products at the rate of 30% of cost of goods sold.
1. Use the simple costing system to prepare a product-line profitability report for FS.
2. Use the ABC system to prepare a product-line profitability report for FS.
3. What new insights does the ABC system in requirement 2 provide to FS managers?