Question

Question 5 (30 marks) A major company sells a range of electrical, clothing and homeware products through a chain of department stores. The main administrative functions are provided from the company's head office. Each department store has its own warehouse which receives goods that are delivered from a central distribution centre, The company currently measures profitability by product group for each store using an absorption costing system. All overhead costs are charged to product groups based on sales revenue. Overhead costs account for approximately one-third of total costs and the directors are concerned about the arbitrary nature of the current method used to charge these costs to product groups. A consultant has been appointed to analyse the activities that are undertaken in the department stores and to establish an activity based costing system. The consultant has identified the following data for the latest period for each of the product groups for the X Town store: Sales revenue Cost of sales Number of deliveries Number of pallets per delivery Number of inventory items Number of customers Number of requisitions Clothing $4400k S2800k 104 50 20000 2100K 522 Product Group Electrical $3300k $2300K 52 20 14000 1050k 243 Homeware $1100k $600k 26 10 6000 350k 135 The consultant has also obtained the following information about the support activities: Activity Customer service Warehouse receiving Warehouse issuing In-store merchandising Central administration Cost driver Number of customers Number of pallets delivered Number of requisitions Number of inventory items Sales revenue Overheads $000 1100 700 300 400 316 Required: a. Calculate the total profit for each of the product groups by using the current absorption costing system (8 marks) b. Calculate the total profit for each of the product groups by using the proposed activity-based costing system. (17 marks) c. Which costing system is preferred? Please discuss. (5 marks) (Total 30 marks) - END OF PAPER - 6