C2. Star Kleymeyer, owner of Star Bakery, wants to know the profitability of eac

Question

C2. Star Kleymeyer, owner of Star Bakery, wants to know the profitability of each of her bakery’s customer groups. She is especially interested in the State Institutions customer group, which is one of the company’s largest. Currently, the bakery is selling doughnuts and snack foods to ten state institutions in three states. The controller has prepared the following income statement for the State Institutions customer group: Star Bakery Income Statement for State Institutions Customer Group For the Year Ended December 31 Sales ($5 per case × 50,000 cases) $250,000 Cost of goods sold ($3.50 per case × 50,000 cases) 175,000 Gross margin $ 75,000 Less: Selling and administrative activity costs (see schedule below) 94,750 Operating income (loss) contributed by State Institutions customer group $ (19,750)

Schedule of Selling and Administrative Activity Costs Activity Activity Cost Rate Actual Cost Driver Level Activity Cost Make sales calls $60 per sales call 60 sales calls $ 3,600 Prepare sales orders $10 per sales order 900 sales orders 9,000 Handle inquiries $5 per minute 1,000 minutes 5,000 Ship products $1 per case sold 50,000 cases 50,000 Process invoices $20 per invoice 950 invoices 19,000 Process credits $20 per notice 40 notices 800 Process billings and collections $7 per billing 1,050 billings 7,350 Total selling and administrative activity costs $94,750 The controller has also provided budget information about selling and administra-tive activities for the State Institutions customer group. For this year, the planned activ-ity cost rates and the annual cost driver levels for each selling and administrative activity are as follows: Activity Planned Activity Cost Rate Planned Annual Cost Driver Level Make sales calls $60 per sales call 59 sales calls Prepare sales orders $10 per sales order 850 sales orders Handle inquiries $5.10 per minute 1,000 minutes Ship products $0.60 per case sold 50,000 cases Process invoices $1 per invoice 500 invoices Process credits $10 per notice 5 notices Process billings and collections $4 per billing 600 billings You have been called in as a consultant on the State Institutions customer group. 1. Calculate the planned activity cost for each activity. 2. Calculate the differences between the planned activity cost and the State Institu-tions customer group’s activity costs for this year. 3. From your evaluation of the differences calculated in 2 and your review of the income statement, identify the non-value-adding activities and state which selling and administrative activities should be examined. 4. What actions might the company take to reduce the costs of non-value-adding sell-ing and administrative activities?

Explanation / Answer

Answer: 1

Answer:2

Answer:3

Selling and administrative activities do not add value to the baked goods,so all of these activities would be non- value adding. The Selling and administrative activities are necessary to serve the customers;however, because they are non - value adding, their costs should be minimized. An evaluation of the difference calculated in 2 indicates that the activities with the highest likelihood of waste or inefficiency are shipping, processing invoices, and processing billings and collections.

Answer:4

Star bakery should consider finding less expensive shipping companies or alternative forms of shipment. Sandee star should examine the processes for invoices, billings and collections. Perhaps more recent software can be used internally to reduce costs, or an outside agency could be used to invoice, bill and collect for the bakery.

Calculation of planned activity cost Activity Planned activity cost rate Planned annual cost driver level Planned activity cost Make sales calls $                                          60.00 59 $                            3,540.00 Prepare sales orders $                                          10.00 850 $                            8,500.00 Handle inquiries $                                             5.10 1000 $                            5,100.00 Ship products $                                             0.60 50000 $                          30,000.00 Process invoices $                                             1.00 500 $                                500.00 Process credits $                                          10.00 5 $                                  50.00 Process billings and collections $                                             4.00 600 $                            2,400.00 Total selling and administrative costs $                          50,090.00

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