Question

I am working on an accounting project related to a supermarket and would like to seek help with regard to its costing system. I was asked to describe the company’s costing system.

I have identified supermarket as a value-added intermediary between suppliers and customers, but how do I classify or describe it's costing system since it does not manufacture its own product. Would there be a manufacturing cost incurred or I can only trace non-manufacturing costs to its products?

I am comparing between job-order costing and activity-based costing.

Answer 1

Supermarkets operate on high volume low margin items to move faster sales with higher volumes.Before delving into the ideal costing method, let's understand the cost break-up of a supermarket first.

• Fixed Costs form the significant component of entire cost spent entirely on the construction of floors, parking, logistics infrastructure, heating & cooling refrigeration systems and personnel. Almost 10% of entire construction market in UK is towards Supermarkets which are giant in structure. The owners attack on high negotiating deals with landlords, logistic supervisors to cut down costs at all levels. Usually locations with high movement & footfall is selected for building supermarkets.
• Cost of Goods Sold is the highest operational cost incurred in supermarket to procure the items available for sale. Since the entire business is driven by volumes, focus should be on procuring fast moving items with higher profitability so they can generate faster sales and occupy less logistic space. Keeping price low and maximising margins need to be delicately balanced.
• Transaction Costs are usually hidden but are significant in supermarkets due to the higher volumes & transactions. Negotiation plays a key role in managing these costs efficiently.

Coming to the costing method, Job Order Costing is applicable in case of job based orders which are more built-to-suit kind of products. Supermarkets generally sell readymade products.

Activity Based Costing is applicable where a product undergoes multiple stages of manufacturing and the cost at each level needs to be identified & analyzed.

The most appropriate method can be Just-in-Time approach where the products arrive either on advance order or based on sales prediction so they get sold out immediately. This not only ensures faster revenues but also reduces space consumption in the limited logistics available at a store.