Harry Super-Store (HS) operates at capacity and decides to apply ABC analysis to
ID: 2581780 • Letter: H
Question
Harry Super-Store (HS) operates at capacity and decides to apply ABC analysis to three product lines: food, home utensils and lifestyle products. It identifies four activities and their activity cost rates as follows:
Ordering $51 per purchase order
Delivery and receipt of merchandise $39 per delivery
Shelf-stocking $42 per hour
Customer support and assistance $0.22 per item sold
The revenues, cost of goods sold, store support costs, activities that account for the store support costs, and activity-area usage of the three product lines are as follows
Food
Home utensils
Lifestyle product
Financial data
Revenues
59500.00
66000.00
51000.00
Cost of goods sold
36000.00
48000.00
34000.00
Store support
10800.00
14400.00
10200.00
Activity-area usage (cost-allocation base)
Ordering (purchase orders)
50
40
30
Delivery (deliveries)
180
70
60
Shelf-stocking (hours)
95
90
20
Customer support (items sold)
13500
17500
8000
Under its simple costing system, HS allocated support costs to products at the rate of 30% of cost of goods sold.
Required
a Use the simple costing system to prepare a product-line profitability report for HS. (8 marks)
b Use the ABC system to prepare a product-line profitability report for HS. (14 marks)
c What new insights does the ABC system in requirement (b) provide to HS managers? (6 marks)
Food
Home utensils
Lifestyle product
Financial data
Revenues
59500.00
66000.00
51000.00
Cost of goods sold
36000.00
48000.00
34000.00
Store support
10800.00
14400.00
10200.00
Activity-area usage (cost-allocation base)
Ordering (purchase orders)
50
40
30
Delivery (deliveries)
180
70
60
Shelf-stocking (hours)
95
90
20
Customer support (items sold)
13500
17500
8000
Explanation / Answer
Harry Super-Store (HS) Use the simple costing system to prepare a product line profitability report for HS Food Home Utensils Lifestyle Product Financial Data a) Revenue 59500 66000 51000 Cost of goods sold 36000 48000 34000 Store support 10800 14400 10200 Profit=(Revenue-Cost of goods sold-Store support) 12700 3600 $ 6,800.00 Percentage of Profit ($12700/$59500)*100=21.34% ($3600/$66000*100=5.45% ($6800/$51000)*100=13.33% Use of ABC System to prepare a product line profitability report for HS Cost Driver Food Home Utensils Lifestyle Product Revenue $ 59,500.00 $ 66,000.00 $ 51,000.00 Cost of goods sold $ 36,000.00 $ 48,000.00 $ 34,000.00 b) Overheads Ordering Purchase Order 51*50=$2550 51*40=$2040 51*30=$1530 Delivering Deliveries 39*180=$7020 39*70=$2730 39*60=$2340 Shelf -stocking Hours 42*95=$3990 42*90=$3780 42*20=$840 Customer Support Item sold 0.22*13500=2970 .22*17500=$3850 .22*8000=$1760 Total Overhead $ 16,530.00 $ 12,400.00 $ 6,470.00 Profit=Revenue-Cost of goods sold-Overheads $ 6,970.00 $ 5,600.00 $ 10,530.00 Percentage of Profit (6970/59500)*100=11.71% (5600/66000)*100=8.48% (10530/51000)*100=20.65% c) As per ABC System lifestyle products are more profitable but in case of simple costing system food products are more profitable. Lifestyle Products consumed less overhead so its profit is more as compared to food products,so Hs should plan to increase sale of Lifestyle products.
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