In: Accounting
Hector Gonzales runs the floral art company, which supplies floral arrangements to three large supermarket chains throughout Australia. Management has become concerned about the rising costs associated with the process and dispatch of orders. An activity analysis of the indirect costs identified the following customer related cost.
Use of cost drivers
Supermarket customers
Activity cost pool |
Cost driver |
Estimated indirect costs |
Total expected use of cost driver** |
1 |
2 |
3 |
Orders processing |
Number of orders |
$200 000 |
450 |
300 |
100 |
50 |
Returns processing |
Number of returns |
$50 000 |
100 |
50 |
25 |
25 |
Delivery |
Number deliveries |
$100 000 |
700 |
400 |
200 |
100 |
Rush orders |
Number of rush orders |
$70 000 |
50 |
10 |
20 |
20 |
Sales visits |
Number of visits |
$20 000 |
100 |
50 |
25 |
25 |
Supermarket customer Sales revenue**
**Selling price is marked up 50% on direct cost of flowers
Hints: conduct a customer profitability analysis based on the above customer related indirect costs.
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Hector Gonzales | ||||
Calculation of ABC rates | A | B | C=A/B | |
Activity cost pool | Cost Driver | Cost | Activity usages | ABC rates |
Orders Processing | Number of orders | 200,000.00 | 450.00 | 444.44 |
Returns Processing | Number of returns | 50,000.00 | 100.00 | 500.00 |
Delivery | Number of deliveries | 100,000.00 | 700.00 | 142.86 |
Rush Orders | Number of rush orders | 70,000.00 | 50.00 | 1,400.00 |
Sales Visits | Number of visits | 20,000.00 | 100.00 | 200.00 |
Total Cost | ||||
Cost Allocation | See C | D | E=C*D | |
Customer 1 | Cost Driver | Activity rates | Activity used | Cost assigned |
Orders Processing | Number of orders | 444.44 | 300.00 | 133,333.33 |
Returns Processing | Number of returns | 500.00 | 50.00 | 25,000.00 |
Delivery | Number of deliveries | 142.86 | 400.00 | 57,142.86 |
Rush Orders | Number of rush orders | 1,400.00 | 10.00 | 14,000.00 |
Sales Visits | Number of visits | 200.00 | 50.00 | 10,000.00 |
See C | F | G=F*C | ||
Customer 2 | Cost Driver | Activity rates | Activity used | Cost assigned |
Orders Processing | Number of orders | 444.44 | 100.00 | 44,444.44 |
Returns Processing | Number of returns | 500.00 | 25.00 | 12,500.00 |
Delivery | Number of deliveries | 142.86 | 200.00 | 28,571.43 |
Rush Orders | Number of rush orders | 1,400.00 | 20.00 | 28,000.00 |
Sales Visits | Number of visits | 200.00 | 25.00 | 5,000.00 |
See C | H | I=H*C | ||
Customer 3 | Cost Driver | Activity rates | Activity used | Cost assigned |
Orders Processing | Number of orders | 444.44 | 50.00 | 22,222.22 |
Returns Processing | Number of returns | 500.00 | 25.00 | 12,500.00 |
Delivery | Number of deliveries | 142.86 | 100.00 | 14,285.71 |
Rush Orders | Number of rush orders | 1,400.00 | 20.00 | 28,000.00 |
Sales Visits | Number of visits | 200.00 | 25.00 | 5,000.00 |
Customer profitability analysis | Customer 1 | Customer 2 | Customer 3 | Note |
Sales | 350,000.00 | 160,000.00 | 210,000.00 | J |
Less: Direct costs | 233,333.33 | 106,666.67 | 140,000.00 | K=J/150% |
Gross margin | 116,666.67 | 53,333.33 | 70,000.00 | |
Less: Customer costs | ||||
Orders Processing | 133,333.33 | 44,444.44 | 22,222.22 | |
Returns Processing | 25,000.00 | 12,500.00 | 12,500.00 | |
Delivery | 57,142.86 | 28,571.43 | 14,285.71 | |
Rush Orders | 14,000.00 | 28,000.00 | 28,000.00 | |
Sales Visits | 10,000.00 | 5,000.00 | 5,000.00 | |
Customer margin | (122,809.52) | (65,182.54) | (12,007.94) |
Conclusion |
There is a loss in selling to each of the customer. |
Advise |
The gross margin from every customer is positive. So Hector should try to reduce indirect costs. |