Question

Question 1 (35 marks) Shun On Computer Company (Shun On) sells computer products, mainly desktops (PCs) and laptops, to small and medium-sized enterprises. The company is also the authorized dealer for one type of accounting software. Based on the contract with the software company, Shun On is required to hire an instructor to support customers in using the software. Shun On operates at capacity and allocates selling, general, and administration (S, G & A) costs to each product line using the cost of merchandise for each product line. Shun On's General Manager is currently very disappointed with the business's results. He wants to optimize the pricing and cost management for each product line, and is wondering if its accounting system is providing it with the best information for making such decisions. The following is a summary of the company's product line information and its selling, general, and administration costs for six months period ended 30 June 2020. Product line information PC Laptop Accounting software $7,600,000 $6,004,000 $5,000,000 $3,750,000 Revenues Cost of merchandise Salary of software instructor Number of purchase orders placed Number of deliveries received Salespeople work hours Unit sold 360 280 2,000 840 540 300 2,800 420 $1,600,000 $1,100,000 $ 108,000 560 360 3,000 1,000 Selling, general and administration costs incurred: Purchasing department expenses Receiving department expenses Sales and marketing department expenses After-sale service expenses (repairs, product returns, etc.) $820,000 800,000 1,100,000 120,000 $2,840,000

Answer 1

A.

S,G & A allocation rate = Total S,G & A incurred / Total cost of merchandise

Total S,G & A incurred = 2840000

Total cost of merchandise = 6004000 + 3760000 + 1100000 = 10864000

.

S,G & A allocation rate = 2840000 / 10864000 = 0.26141

.

To PC = 0.26141 * 6004000 = 1569529

To Laptop = 0.26141 * 3760000 = 982916

To Accounting software = 0.26141 * 1100000 = 287555

.

Product line & total company profitability report

.	PC	Laptop	Accounting software	Total company
Revenue	$7600000	$5000000	$1600000	$14200000
Cost of merchandise	6004000	3760000	1100000	10864000
Salary for S/W instructor			108000	108000
Allocated S, G & A Cost	1569529	982916	287555	2840000
Profit	$26471	$257084	$104445	$388000

.

B.

Improved method

Allocation of S,G&A

Items	cost	Activity	Activity rate	To PC	To Laptop	To Accounting S/W
Purchasing department	820000	360+540+560	820000/	561.64*360	561.64*540	561.64*560 = 314520.55
Allocated based on Number of purchase order	1460	1460	202191.78	303287.6712
		561.64
Receiving dprt -	800000	280+300+360	800000/940		255319.1489	306382.98
Based on delivery received	940	851.06	238297.87
Sale & marketing -	1100000	2000+2800+3000	141.03	282051.28	394871.7949	423076.92
Sales people work hrs	7800
After sales service -	120000	840+420+1000	53.097	44601.77	22300.88496	53097.35
Units sold	2260
			Total	767142.71	975779.50	1097077.80

.

.

Product line & total company profitability report

.	PC	Laptop	Accounting software	Total company
Revenue	7600000	5000000	1600000	14200000
Cost of merchandise	6004000	3760000	1100000	10864000
Salary for S/W instructor			108000	108000
Allocated S, G & A Cost	767143	975779	1097078	2840000
Profit	828857	264221	-705078	388000

.

C.

Allocation in Question B is the accurate method of allocating cost to each department,

Profit in A	$26471	$257084	$104445	$388000
Profit B	828857	264221	-705078	388000

.

Because, more cost S,G&A coat actually incurred by Accounting s/w department. So it is good method to allocate cost and pricing decision,

Current old method the cost are under allocated to Accounting and over allocated to PC,