The Stamford store of Henderson Mart a chain of small neighborhood convenience?
ID: 2509418 • Letter: T
Question
The Stamford store of Henderson Mart a chain of small neighborhood convenience? stores, has a Kaizen? (continuous improvement) approach to budgeting monthly activity costs for each month of 2018. Henderson Mart has three product? categories: soft drinks? (35% of cost of goods sold? [COGS]), fresh snacks? (25% of? COGS), and packaged food? (40% of? COGS). The following table shows the four activities that consume indirect resources at the Stamford ?store, the cost drivers and their? rates, and the? cost-driver amount budgeted to be consumed by each activity in January 2018
1. What are the total budgeted costs for each activity and the total budgeted indirect cost for March 2018? 2. What are the benefits of using a Kaizen approach to? budgeting? What are the limitations of this? approach, and how might Henderson Mart management overcome? them? January 2018 Budgeted Cost-Driver Rate January 2018 Budgeted Amount of Cost Driver Used Soft Fresh Packaged Activity Cost Driver Drinks Snacks Food Ordering Delivery Shelf-stocking Customer support 16 16 24 97 10,800 $ Number of purchase orders Number of deliveries Hours of stocking time Number of items sold 28 85 64 $ 24.00 $ 0.23 19 4,400 34,700Explanation / Answer
1 Calculation of Budgeted cost Driver rate Activity Cost Hierarchy Jan Feb March Ordering Batch Level $ 88.00 $ 87.65 $ 87.30 Delivery Batch Level $ 85.00 $ 84.66 $ 84.32 Shelf-Stocking Output Unit Level $ 24.00 $ 23.90 $ 23.81 Customer Support Output Unit Level $ 0.23 $ 0.229 $ 0.228 Calculation of Total Budgeted Cost for each activity Activity Budgeted Rate- March Soft Drinks Fresh Snacks Packaged Foods Budgeted Activity Cost Ordering $ 87.30 16 28 16 $ 5,238 Delivery $ 84.32 11 64 24 $ 8,348 Shelf-Stocking $ 23.81 19 177 97 $ 6,976 Customer Support $ 0.228 4400 34700 10800 $ 11,377 Total Budgeted Cost $ 31,939 2 A kaizen budgeting approach signals management's commitment to systematic cost reduction. The kaizen budget number will show unfavorable variances for managers whose activities do not meet the required monthly cost reductions. This variance analysis will likely put more pressure on the managers to creatively seek out cost reduction projects. One limitation of kaizen budgeting, as illustrated in this question, is that it assumes small incremental improvements each month. It is possible that some cost improvements arise from large discontinuous changes in operating processes, supplier networks, or customer interactions. Companies need to highlight the importance of seeking these large discontinuous improvements as well as the small incremental improvements.
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