Question: Activity-based costing, activity-based management, merchandising. Mountain Outfitters operates a large outdoor clothing and equipment store with three main product lines: clothing, equipment, and shoes. Mountain Outfitters operates at capacity and allocates selling, general, and administration (S, G & A) costs to each product line using the cost of merchandise of each product line. The company wants to optimize the pricing and cost management of each product line and is wondering if its accounting system is providing it with the best information for making such decisions. Store manager Aaron Budd gathers the following information regarding the three product lines:
For 2017, Mountain Outfitters budgets the following selling, general, and administration costs:
1. Suppose Mountain Outfitters uses cost of merchandise to allocate all S, G & A costs. Prepare budgeted product-line and total company income statements(IS).
2. Identify an improved method for allocating costs to the three product lines. Explain. Use the method for allocating S, G & A costs that you propose to prepare new budgeted product-line and total company income statements. Compare your results to the results in requirement 1.
3. Write a memo to Mountain Outfitters management describing how the improved system might be useful for managing the store.