Question

In: Accounting

Family Supermarkets (FS) decides to apply ABC analysis to three product lines: baked goods, milk and...

Family Supermarkets (FS) 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 R100 per purchase order
Delivery and receipt of merchandise R80 per delivery
Shelf-stocking R20 per hour
Customer support and assistance 20 cents per item sold

The revenues, cost of sales, store support costs, and activity-area usage of the three product lines are:

Baked
goods
Milk and
fruit juice
Frozen
products

Financial data


Revenues
R57 000
R63 000
R52 000

Cost of sales
R38 000
R47 000
R35 000

Store support
R11 400
R14 100
R10 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 the simple (traditional) costing system, FS allocated support costs to products at the rate of 30% of cost of sales.

Required:

2.1 Use the ABC system to calculate the operating income for each of the products. (21)

Solutions

Expert Solution

Allocation if support cost using Activity based costing (ABC) :

Activity area usage Cost allocation base Baked goods Milk and fruit juice Frozen products
Ordering R100 per purchase orders 3000 2500 1300
Delivery R80 per delivery 7840 2880 2240
Shelf stocking R20 per hour 3660 3320 480
Customer support 20 % of item sold 3100 4100 1580
Total support cost 17600 12800 5600

Computation of Cost of sales under ABC :

Baked goods Milk and fruit juice Frozen products
Cost of sales as per traditional costing 38000 47000 35000
(-) Stores Support cost as per traditional costing (11400) (14100) (10500)
26600 32900 24500
(+)Stores support cost as per ABC 17600 12800 5600
Cost of sales as per ABC 44200 45700 30100

Computation of operating income as per ABC :

Baked goods Milk and fruit juice Frozen products
Revenue 57000 63000 52000
(-) Cost of sales as per ABC (44200) (45700) (30100)
Operating income 12800 17300 21900

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ekkarill92 answered 2 years ago
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