ACCOUNTING

Accounting

Paper # 1: Assignment #1 Activity Based Costing

The customer support and distribution costs associated with the three types of customers

Simple strategy cost allocation based on revenues.

Description

Customer Support & Distribution Costs

Department Stores

Specialty Shops

Gift Shops

Total

Activity Level

Activity Level

Activity Level

Revenues

 

$150,000

$100,000

$250,000

$500,000

Total costs/No of orders places

$40,000

10

90

900

 

Total costs/No of sales calls

80,000

5

195

800

 

Total costs/No of shipments

60,000

20

480

1,000

 

Total

$180,000

 

 

 

 

Customer-wise cost allocation percentage

 

30.00%

20.00%

50.00%

100.00%

Customer-wise cost allocation amount

 

$54,000.00

$36,000.00

$90,000.00

$180,000.00

Cost Allocations using activity based costing (ABC).

 

Activity Level

Per Unit Cost

Activity Costs

Total Activity Cost

No of orders places

 

 

 

 

 

 

Department Stores

10

$18.00

180.00

 

 

 

Specialty Shops

90

$36.00

 

3,240.00

 

 

Gift Shops

900

$36.00

 

 

32,400.00

35,820.00

No of sales calls

 

 

 

 

 

 

Department Stores

5

$18.00

90.00

 

 

 

Specialty Shops

195

$36.00

 

7,020.00

 

 

Gift Shops

800

$36.00

 

 

28,800.00

35,910.00

No of shipments

 

 

 

 

 

 

Department Stores

20

$18.00

360.00

 

 

 

Specialty Shops

480

$36.00

 

17,280.00

 

 

Gift Shops

1,000

$36.00

 

 

36,000.00

53,640.00

 

 

 

 

 

 

 

Total Cost Customer-wise

 

 

630.00

27,540.00

97,200.00

125,370.00

Contribution margin less customer support and distribution costs

An organization's contribution margin is the amount of money, in percentage or dollars, available as a result of sales that can contribute to the fixed overhead costs of the organization. The contribution margin it is also extremely significant for instance, higher the amount of contribution margin higher will be the spending of the company in terms of per unit sales. Lastly the breakeven analysis, breakeven analysis is a position, which shows that at what level of sales the profit will be zero, the most vital function of breakeven, is that it shows the relation between the production, volume, cost and return (Hansen & Mowen, 2000). It can further be extended to see the changes on the fixed cost, prices of commodity etc, in other words it shows the lowest amount of money to run the business, which is necessary to avoid losses.

Contribution Margin = Sales Revenue - Variable cost - customer support and distribution costs

Variable Cost Calculations:

Description

Department Stores

Specialty Shops

Gift Shops

Total

Per Unit cost

8

5

10

 

Sales Unit

10000

5000

5000

 

Total Variable Cost

75000

25000

50000

150000

Calculation for Contribution Margin

Simple strategy cost Approach

Department Stores

CM=

$150,000

-

75000

-

$54,000.00

=

$21,000.00

Specialty Shops

CM=

$100,000

-

25000

-

$36,000.00

=

$39,000.00

Gift Shops

CM=

$250,000

-

50000

-

$90,000.00

=

$110,000.00

Total

=

$170,000.00

Activity Based Costing Approach

Department Stores

CM=

$150,000

-

75000

-

$630.00

=

$74,370.00

Specialty Shops

CM=

$100,000

-

25000

-

$27,540.00

=

$47,460.00

Gift Shops

CM=

$250,000

-

50000

-

$97,200.00

=

$102,800.00

Total

=

$224,630.00

Type of customer the company support

The Company should support the Gift Shop customers, because the gifts shop is generating the highest amount of revenue. Besides this the Contribution Margin of Gift Shops customers is also highest as compared to other two type of customers, under both the approaches.

Activity Based Costing (ABC) System serves as an alternate to the company's usual costing system. It provides manager with a helpful tool that aids in making strategic decisions and controls the fixed costs. ABC costing system is especially helpful for decision making that directly affects the capacity of production of a company. In traditional costing systems, the basic aim is to value the inventories and cost of goods sold in accordance with the GAPP (Generally Accepted Accounting Principles) whereas in ABC costing system there are two primary cost systems involved. These systems report accounting based data to both internal and external authorities. It is also used to determine the costs for product for special management reports. The method was founded in 1972 and is basically aimed at improving the traditional costing methods to provide better decision making alternatives to corporations (Grossman & Livingstone, ...