Question

This is a cost allocation problem for a merchandising firm. Since merchandising firms do not have overhead, you must allocate "operating costs" instead of "overhead costs." Also, the allocations in this problem are to a department, not to a product or job. Nonetheless, the allocation process is the same. Just follow the three steps used in the lectures:

Read the problem and question carefully to determine the cost driver.

Compute the "overhead" rate - budgeted operating costs / budgeted driver.

Allocate to the specific department - overhead rate X driver for the specific department.

Remember that with activity-based costing (Part B), there is more than one driver and more than one rate, and the allocation to a department is the sum of several individual allocations.

Books and Brew (BB) is a large city bookstore that sells books and music CD's, and also has a cafe. Currently, BB uses a single-driver system to allocate its operating costs to each of its three product lines, using the the number of items sold as the single cost driver. But BB's management is concerned that this allocation system may not be providing the best information for making a variety of pricing decisions. BB's operating costs for 2017 were as follows:

Purchasing department	$492,000
Receiving department	$443,000
Shelf-stocking employee salaries	$481,000
Cashiers and floor employee salaries	$117,000

2017 information about BB's product lines is also available:

	Books	CD's	Cafe
Revenue	$3,512,000	$2,333,000	$731,000
Cost of merchandise	$2,502,000	$1,710,000	$525,000
Number of purchase orders placed	2,740	2,400	2,000
Number of deliveries received	1,230	1,880	1,480
Hours of shelf stocking time	15,300	13,900	11,100
Number of items sold	132,000	100,000	259,000

REQUIRED [ROUND ALLOCATION RATES TO THE NEAREST CENT AND ALLOCATIONS TO THE NEAREST DOLLAR.]

Using BB's single-driver system to allocate its operating costs, how much was allocated to Books in 2017?

If BB had used an activity-based costing system to allocate its operating costs in 2017, how much would have been allocated to CD's? For cashiers and floor employee salaries, use number of items sold as the cost driver. For all other costs, the appropriate drivers should be clear.

Answer 1

a)	Single driver system:
	Purchasing department	492000
	Receiving department	443000
	Shelf-stocking employee salaries	481000
	Cashiers and floor employee salaries	117000
	Total operating cost	1533000
	Pre-determined operating cost allocation rate = 1533000/(132000+100000+259000) =	$           3.12	Per item sold
	[Single cost driver is number of items sold]
	Operating cost allocated to books = 132000*3.12 =	$   4,09,200
b)	ABC:	Total Cost	Activity Units		Activity Rate
	Purchasing department	492000	7140	Number of POs placed	$      68.91
	Receiving department	443000	4590	Number of deliveries received	$      96.51
	Shelf-stocking employee salaries	481000	40300	Hours of shelf stock time	$      11.94
	Cashiers and floor employee salaries	117000	491000	Number of items sold	$        0.24
	Total operating cost	1533000
	Operating cost allocated to CD's:	Activity Rate	Activity Units	Amount allocated
	Purchasing department	$         68.91	2400	$                                 1,65,378.15
	Receiving department	$         96.51	1880	$                                 1,81,446.62
	Shelf-stocking employee salaries	$         11.94	13900	$                                 1,65,903.23
	Cashiers and floor employee salaries	$           0.24	100000	$                                     23,828.92
	Amount allocated to CD's under ABC system			$                                 5,36,556.92