This is a cost allocation problem for a merchandising firm. Since merchandising

Question

This is a cost allocation problem for a merchandising firm. Since merchandising firms do not have overhead, you must allocate "operating costs" instead of "overhead costs." Also, the allocations in this problem are to a department, not to a product or job. Nonetheless, the allocation process is the same. Just follow the three steps used in the lectures:

Read the problem and question carefully to determine the cost driver.

Compute the "overhead" rate - budgeted operating costs / budgeted driver.

Allocate to the specific department - overhead rate X driver for the specific department.

Remember that with activity-based costing (Part B), there is more than one driver and more than one rate, and the allocation to a department is the sum of several individual allocations.

Books and Brew (BB) is a large city bookstore that sells books and music CD's, and also has a cafe. Currently, BB uses a single-driver system to allocate its operating costs to each of its three product lines, using the the number of items sold as the single cost driver. But BB's management is concerned that this allocation system may not be providing the best information for making a variety of pricing decisions. BB's operating costs for 2017 were as follows:

2017 information about BB's product lines is also available:

REQUIRED [ROUND ALLOCATION RATES TO THE NEAREST CENT AND ALLOCATIONS TO THE NEAREST DOLLAR.]

Using BB's single-driver system to allocate its operating costs, how much was allocated to Books in 2017?

If BB had used an activity-based costing system to allocate its operating costs in 2017, how much would have been allocated to CD's? For cashiers and floor employee salaries, use number of items sold as the cost driver. For all other costs, the appropriate drivers should be clear.

Purchasing department $492,000 Receiving department   $443,000 Shelf-stocking employee salaries   $481,000 Cashiers and floor employee salaries   $117,000

Explanation / Answer

a) Single driver system: Purchasing department 492000 Receiving department 443000 Shelf-stocking employee salaries 481000 Cashiers and floor employee salaries 117000 Total operating cost 1533000 Pre-determined operating cost allocation rate = 1533000/(132000+100000+259000) = $           3.12 Per item sold [Single cost driver is number of items sold] Operating cost allocated to books = 132000*3.12 = $   4,09,200 b) ABC: Total Cost Activity Units Activity Rate Purchasing department 492000 7140 Number of POs placed $      68.91 Receiving department 443000 4590 Number of deliveries received $      96.51 Shelf-stocking employee salaries 481000 40300 Hours of shelf stock time $      11.94 Cashiers and floor employee salaries 117000 491000 Number of items sold $        0.24 Total operating cost 1533000 Operating cost allocated to CD's: Activity Rate Activity Units Amount allocated Purchasing department $         68.91 2400 $                                 1,65,378.15 Receiving department $         96.51 1880 $                                 1,81,446.62 Shelf-stocking employee salaries $         11.94 13900 $                                 1,65,903.23 Cashiers and floor employee salaries $           0.24 100000 $                                     23,828.92 Amount allocated to CD's under ABC system $                                 5,36,556.92

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