Super Bookstore is a large city bookstore that sells books and music CDs and has
ID: 2458507 • Letter: S
Question
Super Bookstore is a large city bookstore that sells books and music CDs and has a café. Super Bookstore operates at capacity and allocates selling, general, and administration (S, G, and A) costs to each product line using the cost of merchandise of each product line. Super Bookstore wants to optimize the pricing and cost management of each product line. The bookstore is wondering whether its accounting system is providing it with the best information for making such decisions.
Super Bookstore Product Line Information for the Year Ended December 31, 2012
Super Bookstore incurs the following S, G, and A costs.
Based on the data, solve the following problems: a. Suppose Super Bookstore uses the cost of merchandise to allocate all S, G, and A costs. Prepare product line and total company income statements. b. Explain an improved method for allocating costs to the three product lines. Use the method for allocating S, G, and A costs that you propose to prepare new product line and total company income statements. Compare your results with the results in Problem a. c. Write a memo to Super Bookstore’s management describing how the improved system might be useful for managing Super Bookstore. Submission Requirements: Use MS Excel workbook to show the supporting analysis. For memo, use the textbox in the MS Excel workbook. Show the detailed steps that you performed to solve the problem.
BOOKS CDs Cafe Revenues $3,720,480 $2,315,360 $736,216 Cost of Merchandise $2,656,272 $1,722,311 $556,685 Cost of cafe cleaning -- -- $18,250 Number of purchase orders 2800 2500 2000 Number of deliveries recieved 1400 1700 1600 Hours of shelf stocking time 1500 1400 1000 Items sold 12016 115768 368108Explanation / Answer
a) Product line and total company income statement (using merchandise cost for allocation of other costs)
b) The basis used for allocation of the indirect costs like purchase dept cost, receiving dept costs, shelf stocking labour cost and customer support expenses on the basis of the cost of merchandise is unscientific in that these costs have no relation to the merchandise cost of the individual sections; rather they are driven by other factors.
Such other factors known as 'cost drivers', are instrumental in building up the indirect costs. These are
Expenses Cost Drivers
If allocation of these indirect costs are made on the basis of the above cost drivers, a better ascertainment of cost of the services will be available, and hence correct profitability of individual services.
The Product line and Total company income statement is prepared as below:
The allocation of indirect costs on the basis of cost drivers has shown that the cafe is making huge losses. It also shows the profit of the other sections more accurately. In the earlier method, the cafe is shown as making profits.
The working notes are given below:
c) Memo to the Management:
The current accounting system needs improvement in the area of allocation of the indirect costs (service dept costs) like the purchase dept costs,etc. At present, these costs are allocated to the three divisions on the basis of the cost of merchandise.
The costs incurred in these service departments are not in any way related to the merchandise used in the three ,sections. These service department costs are driven by cost drivers like no of purchase orders for the cost of the purchasing department etc. Hence, there should be a system which will trace the costs to these costs drivers in the first instance, and then allocate them to the user departments according to the no of units of the cost drivers utilised by them.
This is done in the revised product wise profitability statement.
As can be seen the new system of allocation of indirect costs to the user departments on the basis of cost drivers, has helped in better allocation of costs and determination of proper product wise profitability.
The revised income statement brings out the fact that the cafe is making huge losses. Further investigation is to be done to review the operations of the cafe and to decide on whether to shut down the cafe or not.
PRODUCT LINE AND TOTAL COMPANY INCOME STATEMENTS (with allocation of S, G & A costs on the basis of cost of merchandise) Books CDs Café Total Revenues 3720480 2315360 736216 6772056 Costs: Merchandise cost 2656272 1722311 556685 4935268 Café Cleaning 18250 18250 Purchasing dept exps 255387 165591 53522 474500 Receiving dept exps 232727 150899 48774 432400 Shelf stocking labor exp 262383 170128 54989 487500 Customer support exp 49077 31821 10285 91184 Total Costs 3455847 2240750 742505 6439102 Operating profit 264633 74610 -6289 332954Related Questions
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