Supermarkets (Upper FS) operates at capacity and decides to apply ABC analysis t
ID: 2541596 • Letter: S
Question
Supermarkets (Upper FS) 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 of30% of cost of goods sold.
Requirements
1.
2.
3.
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
Explanation / Answer
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 assistance@0.18 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.