Question

Describe how a large retailer such as Vons would assign overhead costs to the products it sells in its stores?

Managerial Accounting

Answer 1

Overhead costs are those costs that are indirect in nature. These costs cannot be directly tied with the costs that we incur in production.  Overhead costs are applied to a product using an overhead rate. If you calculate your total costs, you can properly price your product. Management can then come up with a price that will generate a desired profit margin.

When there is a huge retail business like that of the Supermarket, it is important to know the Grocery chain. It has many many branches with a central warehouse and a general office.Each store on an individual basis makes a profit. Individual stores: Sales – COGS = Gross Profit – Store Expense = Profit..

In order to allocate overhead costs, it is first important to compute each store's percentage of total store profit and then distribute the overhead on those percentages. This is used as we should not let the evaluation of the mixture lead you to a mis evaluation of the individual elements. Each method of allocating overheads will have its pros and cons. In few instances each individual branch might not report their complete profit. When there are many outlets, it is important to consider both individual and total values. Hence considering each branch's separate profit and consolidating it with the Company as a whole would be preferable.