Question

: Frlendly Grocer Frieudly Grocer has three departments in its store: beverages, dairy and meats, and caed and packnged foods. Each department is headed by a departmental manager. Operating results for the lst month in thousands) are givenin the table Canned and Packaged Foods $620.00 Dairy and Beverages $250.00 200.00 Meats $470.00 329.00 65.80 75.20 Total 1,340.00 1,056.00 Direct costs: Cost of goods sold (CoGS) 527.00 Indirect costs: SG&A (20% of COGS) 40.00 105.40 211.20 Operating income $ 10.00 $(12.40) $ 72.80 The direet costs consist of the cost of goods sold. Indirect casts consist of seng, general, amd administrative (SG&A) costs and are allocated to each department at the rate of 20 percent of costs of goods sold. Based on the preceding report, boveragus had oerating ineome of 10,000, dairy aud meats had operating income of S75,200, and canned and packaged foods lost $12,400 Seior managemen is concerned ta to allocation of costs might be distorting the relative profitability of the three departments. Further analysis of the SG&A account yields the following breakdown: Shelf space costs Handling costs Coupon costs Shrinkage Other indirect costs Total $90.00 20.00 15.00 28.00 58,20 $211.20 Shelf space costs consist of store occupancy costs such as depreciation on the building and fixtures, utilities, store maintenance, property taxes, md insnrance. Beverages make up 25 percent of the shelf space, dairy and meats make up 35 percent of the space, and caed and packaged goods make up 40 percent of the shelfspace. Handng costs consist of the labor required to stock tlie shelves and remove outdated produets. The boverage supplieis (Coca-Cola. Pepsi, etc.) provide the labor to shelve their prvducts i.o.. tlo beverage delivery peoplo stock their products on the shelf). Dairy aalshr cosls lor stooking re (hrve-quarters of the bandling costs; canned and package foods' labor and bandling costs are one-quarter of the total. Coupon costs consist of the labor costs to process the rodccmed coupons. Dairy and mcats do not have any coupons. Twenty pereent of the couporus redeeined are for beverages and 80 peicent are for packaged and canned foods. Shrinkage consists of the cost of products spoiled, broken, and stolen. Shrinkage by product category comes to Beverages Dairy and meats Canned and packaged foods 21 The remaining indirect costs are allocated based on cost of goods sold. Required. a. Apply an activity-based costing system and recalculate the operating income of the three departments. 6

Answer 1

Calculation of operating income based on ABC
	Beverages	Dairy and meals	Canned and packaged food	Total
Sales	250.00	470.00	620.00	1,340.00
Direct Cost	200.00	329.00	527.00	1,056.00
Indirect Cost	37.52	85.63	88.04	211.20
Operating Income	12.48	55.37	4.96	72.80

Notes:

Allocation of SG&A Cost
	Beverages	Dairy and meals	Canned and packaged food	Total
Shelf space cost	22.5	31.5	36	$90
	(90*25%)	(90*35%)	(90*40%)
Handling cost	0	15	5	$20
		(20*3/4)	(20/4)
Coupon cost	3	0	12	15
	(15*20%)		(15*80%)
Shriankage	1	21	6	28
	(Given)	(Given)	(Given)
Other Indirect Cost	11.02	18.13	29.04	58.2
	(58.2*(200/1056))	(58.2*(329/1056))	(58.2*(527/1056))
Total	37.52	85.63	88.04	211.20