Moscovitz Produce (MP) developed data (shown below) on indirect costs in order t
ID: 2528140 • Letter: M
Question
Moscovitz Produce (MP) developed data (shown below) on indirect costs in order to improve its assessment of customer profitability. Web orders are placed by customers on the MP web site, while manual orders are phoned into the sales office. SKU's (stock keeping units) are identifiers used to reference specific inventory items. Data on two of MP's customers is also provided. Total Cost Driver Activity Customer Cost Pool Web orders Manual orders Picking orders Packagingorders Returns Annual Cost Cost Driver # of web orders # of phone orders # of SKU's ordered # of items ordered # of returns Acme Deli Boson Cafe $1,000,000 $2,000,000 $3,000,000 $1,500,000 $3,000,000 250,000 400,000 100,000 50,000,000 50,000 Activity Web orders Manual orders Picking orders Packagingorders Returns 500 1,000 1,800 1,000,000 200 800 1,000,000 Acme Deli and Boson Cafe each generated revenues in the prior year of S580,000 and had cost of goods sold associated with their orders of S500,000 Answers Calculate an activity rate for Web orders (S per order) Using an Activity Based Costing approach determine the total indiredt costs assigned to the Acme Deli. Using an Activity Based Costing approach determine the total indirect costs assigned to the Boson Café Determine the overall profitability of the Acme Deli. Determine the overall pro fitability of the Boson CafeExplanation / Answer
Solution:
Activity Based Costing System
- ABC is a costing method which identifies the activities in the organization and assigns the cost of each activity with resources to all the products or services according to the actual consumption of activity by the product or service.
- This system determines all the activities related to product or production process.
- This system calculates the cost of those activities which are related to product or production process and thereafter determine the cost of the product.
- In ABC costing the overhead costs are distributed to the product on the basis of benefit received from indirect activity.
- It helps to distribution of overheads on the basis of activities.
The Activity based overhead rate = Estimated Overheads related to the activity / Total Cost Driver per activity)
Primary working for all the requirements:
Allocation of Overhead to Customers
Acme Dell
Boson Cafe
Cost Pool
Annual Cost (A)
Total Activity of Cost Driver (B)
Activity Rate per Activity (C = A/B)
Activity Driver USAGE (H)
Overhead Assigned (C*H)
Activity Driver USAGE (S)
Overhead Assigned (C*S)
Web Orders
$1,000,000
250000
web orders
$4.00
500
$2,000
0
$0
Manual orders
$2,000,000
400000
phone orders
$5.00
0
$0
1000
$5,000
Picking orders
$3,000,000
100000
SKU's orders
$30.00
800
$24,000
1800
$54,000
Packing orders
$1,500,000
50000000
iterms ordered
$0.03
1000000
$30,000
1000000
$30,000
Returns
$3,000,000
50000
Returns
$60.00
2
$120
200
$12,000
$10,500,000
$56,120
$101,000
1) Activity Rate for web orders ($ per order) = $4 per order
2) Total Indirect Cost assigned to Acme Dell = $56,120
3) Total Indirect Cost assigned to Boson Café = $101,000
4) Overall profitability of Acme Dell = Revenue – Cost of Goods Sold – Indirect Cost assigned
= $580,000 – 500,000 – 56,120
= $23,880
5) Overall profitability of Boson Cafe = Revenue – Cost of Goods Sold – Indirect Cost assigned
= $580,000 – 500,000 – 101,000
= ($21,000) Loss
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Allocation of Overhead to Customers
Acme Dell
Boson Cafe
Cost Pool
Annual Cost (A)
Total Activity of Cost Driver (B)
Activity Rate per Activity (C = A/B)
Activity Driver USAGE (H)
Overhead Assigned (C*H)
Activity Driver USAGE (S)
Overhead Assigned (C*S)
Web Orders
$1,000,000
250000
web orders
$4.00
500
$2,000
0
$0
Manual orders
$2,000,000
400000
phone orders
$5.00
0
$0
1000
$5,000
Picking orders
$3,000,000
100000
SKU's orders
$30.00
800
$24,000
1800
$54,000
Packing orders
$1,500,000
50000000
iterms ordered
$0.03
1000000
$30,000
1000000
$30,000
Returns
$3,000,000
50000
Returns
$60.00
2
$120
200
$12,000
$10,500,000
$56,120
$101,000
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