Question

Z-Mart operates a supermarket with three product lines: Baked Goods, Milk, and Frozen Foods. The revenues and cost data of the three product lines are:

	Baked Goods	Milk	Frozen Foods	Total
Revenues	$59,500	$66,000	$50,500	$176,000
Cost of Goods Sold	$40,000	$49,000	$37,000	$126,000
Store Support Cost				$ 37,800

Under the simple costing system, Z-Mart allocated its indirect cost (i.e., Store Support costs) to products at the rate of 30% of cost of goods sold.

a) Using the simple costing system, compute operating income of each of three product lines.

Now, Z-Mart decides to apply ABC analysis to its three product lines. It identifies four activities that drive Store Support costs. The activities, the total cost of each activity, the allocations bases, and level of each activity in the three product-lines are reported below:

Activity (Activity)	Total Activity Cost	Activity cost allocation base	Activity Level
			Baked Goods	Milk	Frozen Foods	Total
Ordering (Ordering)	$   5,985	# of Purchase orders	27	18	12	57
Delivery and receipt of merchandise	$ 14,280	# of deliveries	105	35	30	170
Shelf-Stocking (Self)	$   7,360	# of Shelf-Stocking hours	160	130	30	320
Customer support and assistance	$ 10,175	# of items sold	14,000	18,500	8,200	40,700
	$ 37,800

b) Using the ABC costing system, compute operating income of each of three product lines.

c) What new insights does the ABC system provide?

Answer 1

Z-Mart Solution a) Computation of Operating Income - Simple Costing System Baked Goods Milk Frozen Foods Revenues $ 59,500 $ 66,000 $ 50,500 $ less: Cost of Goods sold $ 40,000 $ 49,000 $ 37,000 $ less : Support costs @ 30% $ 12,000 $ 14,700 $ 11,100 $ Net Operating Income $ 7,500 $ 2,300 $ 2,400 $ Total 1,76,000 1,26,000 37,800 12,200 Solution b) Activity Cost Pools Estimated Overhead Activity Based Overhead Rates Estimated use of Cost Drivers per Activity # of purchase 57 orders $ 5,985 $ 105.00 per purchase order Ordering Delivery and Receipts of mechandise $ 14,280 $ 84.00 per delivery # of 170 deliveries # of shelf 320 stocking # of items 40700 sold $ 7,360 $ Shelf Stocking Customer support and assistance 23.00 per shelf stocking $ 0.25 per item sold $ 10,175 $ 37,800

Baked Goods Activity Based Estimated use of cost Overhead driver per product Rates Cost Assigned 27 $ 105.00 $ 2,835 Milk Activity Based Estimated use of cost Overhead Cost driver per product Rates Assigned 18 $ 105.00 $ 1,890 Frozen Foods Activity Estimated use of Based cost driver per Overhead Cost product Rates Assigned 12 $ 105.00 $ 1,260 Activity Cost Pools Ordering Delivery and Receipts of mechandise Shelf Stocking Customer support and assistance 35 30 105 160 $ $ 84.00 $ 23.00 $ 8,820 3,680 $ $ 84.00 $ 2,940 23.00 $ 2,990 $ $ 84.00 $ 2,520 23.00 $ 690 130 30 14000 $ 18500 $ 8200 $ 0.25 $ $ 3,500 18,835 0.25 $ 4,625 $ 12,445 0.25 $ 2,050 $ 6,520 Milk Computation of Operating Income - ABC Costing System Baked Goods Frozen Foods Revenues $ 59,500 $ 66,000 $ 50,500 $ less : Cost of Goods sold $ 40,000 $ 49,000 $ 37,000 $ less : Support costs @ 30% $ 18,835 $ 12,445 $ 6,520 $ Net Operating Income $ 665 $ 4,555 $ 6,980 $ Total 1,76,000 1,26,000 37,800 12,200 Solution c) Baked Goods $ 12,000 $ $ 18,835 $ Support Costs Simple) Support Costs (ABC) Milk Frozen Foods 14,700 $ 11,100 12,445 $ 6,520 It shows that Actual allocation of Support cost should be more in Baked Goods, while initially Support costs were absorbed highest in Milk

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