Activity Based Costing - Essay Example

? Activity Based Costing Calculate the support and distribution costs associated with the three types s. Revenue allocation of costs based on selling price (Direct Costing) (Lal, 2008) Department Stores Specialty Shops Gift Shops Total Sales in units 10,000 5,000 5,000 5,000 Production cost $45,000 $30,000 $75,000 $150,000 Production Overhead $36,000 $24,000 $60,000 $120,000 Selling & Distribution Costs $54,000 $36,000 $90,000 $180,000 Total $135,000 $90,000 $225,000 $450,000 Activity Based Costing (ABC) (Weygandt, Kimmel & Kieso, 2010). Department Stores Specialty Shops Gift Shops Total Total costs/No of orders places $400 $ 3,600 $ 36,000 $40,000 Total costs/No of sales calls $400 $ 15,600 $ 64,000 $ 80,000 Total costs/No of shipments $800 $ 19,200 $ 40,000 $ 60,000 Variable production cost $2,500 $ 22,500 $ 125,000 $ 150,000 Production Overhead $2,000 $ 18,000 $ 100,000 $ 120,000 Total Cost $ 6,100 $ 78,900 $365,000 $ 450,000 2. Determine contribution margin less customer support and distribution costs for both approaches above. Direct Costing (Avis, 2009) Department Stores Specialty Shops Gift Shops Revenues $150,000 $100,000 $250,000 Less Variable production cost $45,000 $ 30,000 $ 75,000 Contribution margin $105,000 $ 70,000 $175,000 Activity Based Costing (ABC) (Kinney & Raiborn, 2009). Department Stores Specialty Shops Gift Shops Revenues $150,000 $100,000 $250,000 Less Variable production cost $2,500 $ 22,500 $ 125,000 Contribution margin $147,500 $ 77,500 $125,000 3. Which type of customer should the company support and why? Refer to your analysis in your response. Based on the activity based costing (ABC) method, the company should increase the number of department stores, as part of its expansion strategy (Chakraborty, 2004). This is because, unlike the direct simple costing method, the activity based costing (ABC) has a higher level of accuracy. More than that, it traces back the cost to the activities and processes (Heisinger, 2010). Above all, use of activity based costing (ABC) method especially in companies with diverse centers and distribution channels has proven to be suitable. Unlike other methods, the activity based costing (ABC) method ensures that there exists a direct correlation between the related overhead costs and the occurrence of an activity (Chang, 2010). Without doubt, the marketing manager decision to use the activity based costing (ABC) method, as a way of critically analyzing the customer support and distribution costs is more suitable, as compared to taking the store with the highest contribution margin ratio. Workings Cost allocation based on revenue Total revenue is $ 500,000 1) Department Stores = $150,000/ $500,000 = 0.3 2) Specialty Shops = $100,000/ 500,000 = 0.2 3) Gift Shops = $250,000/500,000 = 0.5 (Bragg, 2002) i) Variable production cost is $150,000 Department Stores = $150,000 * 0.3= $45,000 Specialty Shops = $150,000 * 0.2 = $ 30,000 Gift Shops = $150,000 * 0.5 = $ 75,000 ii) Production Overhead $120,000 Department Stores = $120,000 * 0.3= $36,000 Specialty Shops = $120,000 * 0.2 = $ 24,000 Gift Shops = $120,000 * 0.5 = $ 60,000 iii) Selling & Distribution Costs $180,000 Department Stores = $180,000 * 0.3= $54,000 Specialty Shops = $180,000 * 0.2 = $ 36,000 Gift Shops = $180,000 * 0.5 = $ 90,000 Activity Based Costing (ABC). Total costs/No of orders places $40,000 10 90 900 Cost drive is the number of orders placed Department Stores = $40,000 * 10/1000= $400 Specialty Shops = $40,000 * 90/1000 = $ 3,600 Gift Shops = $40,000 * 900/1000 = $ 36,000 (Finkler, Ward & Baker, 2007) Total costs/No of sales calls 80,000 5 195 800 Cost drive is the number of sales calls Department Stores = $80,000 * 5/1000= $400 Specialty Shops = $80,000 * 195/1000 = $ 15,600 Gift Shops = $80,000 * 800/1000 = $ 64,000 Total costs/No of shipments 60,000 20 480 1,000 Department Stores = $60,000 * 20/1500= $800 Specialty Shops = $60,000 * 480/1500 = $ 19,200 Gift Shops = $60,000 * 1000/1500 = $ 40,000 Allocation of other costs is based on the number of customers No of customers 5 45 250 iv) Variable production cost is $150,000 Department Stores = $150,000 * 5/300= $2,500 Specialty Shops = $150,000 * 45/300 = $ 22,500 Gift Shops = $150,000 * 250/300 = $ 125,000 v) Production Overhead $120,000 Department Stores = $120,000 * 5/300= $2,000 Specialty Shops = $120,000 * 45/300= $ 18,000 Gift Shops = $120,000 * 250/300= $ 100,000(Crosson & Needles, 2008) References Avis, J. (2009). P2 - Performance management. Oxford, U.K: CIMA/Elsevier. Bragg, S. (2002). Accounting reference desktop. New York: John Wiley & Sons. Chakraborty, S. (2004). Cost accounting and financial management. New Delhi: New Age International. Chang, C. (2010). Service systems management and engineering : creating strategic differentiation and operational excellence. Hoboken, N.J: John Wiley & Sons. Crosson, S. & Needles, B. (2008). Managerial accounting. Boston, MA: Houghton Mifflin Co. Finkler, S., Ward, D. & Baker, J. (2007). Essentials of cost accounting for health care organizations. Sudbury, Mass: Jones and Bartlett Publishers. Heisinger, K. (2010). Essentials of managerial accounting. Mason, OH: Southern-Western Cengage Learning. Kinney, M. & Raiborn, C. (2009). Cost accounting: foundations and evolutions. Mason, OH, USA: Thomson/South-Western. Lal, J. (2008). Cost accounting. New York: Tata McGraw-Hill Education. Weygandt, J., Kimmel, P. & Kieso, D. (2010). Managerial accounting: tools for business decision making. Hoboken, NJ: Wiley. Read More