Question

CarlsonCarlson

Supermarkets

​(Upper CC​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:

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​

Ordering	$ 102$102 per purchase order
Delivery and receipt of merchandise	$ 78$78 per delivery
​Shelf-stocking	$ 21$21 per hour
Customer support and assistance	$ 0.22$0.22 per item sold

The​ revenues, cost of goods​ sold, store support​ costs, activities that account for the store support​ costs, and​ activity-area usage of the three product lines are as​ follows:

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Milk and	Frozen
	Baked Goods	Fruit Juice	Products
Financial data
Revenues	$60,000	$66,000	$52,500
Cost of goods sold	$36,000	$48,000	$34,000
Store support	$10,800	$14,400	$10,200

Activity-area usage
(cost-allocation base)
Ordering (purchase orders)	25	20	15
Delivery (deliveries)	90	35	30
Shelf-stocking (hours)	190	180	40
Customer support (items sold)	13,500	17,500	8,000

Under its simple costing​ system,

Upper CCS

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

Requirement 1. Use the simple costing system to prepare a​ product-line profitability report for

Upper CCS.

​(Round the percentages to the nearest hundredth​ percent, X.XX%.)

			Milk and		Frozen
	Baked Goods		Fruit Juice		Products		Total
Revenues
Costs
Cost of goods sold
Store support
Total costs
Operating income
Operating income/Revenues		%		%		%		%

Answer 1

1. Income Statement under Simple Costing
	Baked Goods	Fruit Juice	Frozen Product
Revenue	$60,000	$66,000	$52,500
Less: Cost of Goods Sold	-$36,000	-$48,000	-$34,000
Gross Margin	$24,000	$18,000	$18,500
Less:Other Operating Expense
Support Cost	-$10,800	-$14,400	-$10,200
Net Income	$13,200	$3,600	$8,300
Operating Income %	22%	5%	16%
2. Income Statement under Activity Based Costing
	Baked Goods	Fruit Juice	Frozen Product
Revenue	$60,000	$66,000	$52,500
Less: Cost of Goods Sold	-$36,000	-$48,000	-$34,000
Gross Margin(1)	$24,000	$18,000	$18,500
Less:Other Operating Expense
Less: Activities Cost
Ordering Cost	$2,550	$2,040	$1,530
Delivery and Receipt of Merchandise	$7,020	$2,730	$2,340
Shelf Shocking	$3,990	$3,780	$840
Customer Support and Assistance	$2,970	$3,850	$1,760
Total Activities Cost (2)	$16,530	$12,400	$6,470
Net Income(1-2)	$7,470	$5,600	$12,030
Working Note Showing Allocation of Cost
	Baked Goods	Fruit Juice	Frozen Product
Ordering Purchase Order	25	20	15
Ordering Cost ($102/Order)	$2,550	$2,040	$1,530
Delivery( Deliveries)	90	35	30
Delivery and Receipt of Merchandise ($78/Delivery)	$7,020	$2,730	$2,340
Shelf Stocking ( Hours)	190	180	40
Shelf Shocking ($21/Hour)	$3,990	$3,780	$840
Customer Support ( Items Sold)	13500	17500	8000
Customer Support and Assistance ($0.22/items Sold)	$2,970	$3,850	$1,760
3. As per Simple costing system, profitability of Baked goods is higher as compare with the rest of the product while as per ABC costing, Frozen Product is higer as compare with other product. Further Profitability for all the product are showing on least side as per ABC Costing System