Question

Supermarkets ​(Upper F​S) operates at capacity and 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​ follows:

Ordering	$ 98 per purchase order
Delivery and receipt of merchandise	$ 81 per delivery
​Shelf-stocking	$ 22 per hour
Customer support and assistance	$ 0.18 per item sold

Milk and	Frozen
	Baked Goods	Fruit Juice	Products
Financial data
Revenues	$61,500	$67,000	$52,500
Cost of goods sold	$37,000	$45,000	$36,000
Store support	$11,100	$13,500	$10,800

Activity-area usage
(cost-allocation base)
Ordering (purchase orders)	35	30	20
Delivery (deliveries)	85	45	30
Shelf-stocking (hours)	175	155	25
Customer support (items sold)	12,000	16,000	7,000

Under its simple costing​ system, Upper FFS allocated support costs to products at the rate of​30% of cost of goods sold.

Requirements

1.	Use the simple costing system to prepare a​ product-line profitability report for Upper FFS.
2.	Use the ABC system to prepare a​ product-line profitability report for Upper FFS.
3.	What new insights does the ABC system in requirement 2 provide to Upper FFS ​managers?

Answer 1

INCOME STATEMENT UNDER SIMPLE COSTING
				BAKED GOODS	FRUIT JUICE	FROZEN PRODUCTS
Revenues				61500	67000	52500
Less: Cost of goods sold				37000	45000	36000
Gross margin				24500	22000	16500
Less: Other operating expense
Support cost				11100	13500	10800
Net income				13400	8500	5700
INCOME STATEMENT UNDER ACTIVITY BASED COSTING
				BAKED GOODS	FRUIT JUICE	FROZEN PRODUCTS
Revenues				61500	67000	52500
Less: Cost of goods sold				37000	45000	36000
Gross margin				24500	22000	16500
Less: Other operating expense
Less: Activities cost:
Ordering cost @98 per order				3430	2940	1960
Delivery and reciept of Merchandise@81 per delivery				6885	3645	2430
Shelf shocking @22 per hour				3850	3410	550
Customer support and [email protected] per item				2160	2880	1260
Net income				8175	9125	10300
As per simple costing, followed by management earlier, the Product -Baked goods is most profitable in terms of $.
However, when ABC costing is followed, this become shows thte least profitability and the product which shows the least profitablity earlier i.e. Frozen products sis highest profit earner.