Question

For each of the following three businesses, which costing method would better reflect the business’s economic reality?

a. Art dealer

b. Automobile manufacturer

c. Specialty liquor store

Answer 1

	costing method
Art dealer	SIMPLE COST METHOD(COGS+PROFIT = SALE)
Automobile manufacturer	ACTIVITY BASE COSTING
Specialty liquor store	SIMPLE COST METHOD(COGS+PROFIT = SALE)

Art dealer

An art dealer is a person or company that buys and sells works of art, or acts as the intermediary between the buyers and sellers of art.

Automobile manufacturer

Most methods for estimating manufacturing costs begin by identifying specific changes in vehicle components or designs, and they then develop individual cost estimates for each affected item. Most changes result in cost increases, but some, such as the downsizing of a V6 engine to an I4, will reduce costs. Component cost estimates can come from a variety of sources, including interviews of original equipment manufacturers (OEMs) and suppliers, prices of optional equipment, and comparisons of models with and without the technology in question. Total costs are obtained by adding up the costs of changes in the individual components.

Specialty liquor store

Liquor cost is one of the primary ways in which bars evaluate their performance. Ultimately, the lower your liquor cost, the greater the profits you will generate from each drink. As a result, it is in your best interests to carefully monitor your bar’s liquor cost and take advantage of any potential opportunities to lower it.

Essentially, liquor cost measures how much you spend on a product to generate each dollar in sales. For example, if you spend 50 cents on a Jack Daniels cocktail that sells for $5.00, then your liquor cost for that drink is 10%. In other words, for every dollar of sales generated by that drink, your cost is 10 cents.