5-41

Activity-based costing

Super Bookstore
Product line & Total Company Income Statement
For the Year Ended December 31, 2010
Books

CDs

Caf

Total

Revenues

$ 3,720,480

$ 2,315,360

$ 736,216

$ 6,772,056

Cost of Merchandise

$ 2,656,727

$ 1,722,311

$ 556,685

$ 4,935,723

Cost of caf cleaning

18,250

18,250

Allocated selling, general and administration costs

(0.300986 x $2,656,727; $1,722,311; $556,685)

799,638

518,392

Operating Income

264,115

74,657

Operating Income/Revenue

7%

$ 167,554
$

3.20%

$ 1,485,584

(6,273) $

332,499

-0.85%

4.90%

(overhead rate = 1,485,584/4,935,723 = .300986 per cost of merchandise dollar)

2 Since the (S,G & A) includes numerous costs, there are many costs that should not be consumed all across the product lines under
the cost of merchandise.
Books

CDs

Caf

Total

Number of purchase orders

2,800

2,500

2,000

Number of deliveries received

1,400

1,700

1,600

4,700

15,000

14,000

10,000

39,000

124,016

115,768

368,108

607,892

Hours of shelf stocking time

Items sold
Purchasing

$474,500/7300 = $65 per purchase order

Receiving

$432,400/4700 = $92 per delivery

Stocking

$487,500/39,000 = $12.50 per stocking hour

Customer support

7,300

$91,184/607,892 = $0.15 per item sold

Books

CDs

Caf

Total

Revenues

$ 3,720,480

$ 2,315,360

$ 736,216

$ 6,772,056

Cost of Merchandise

$ 2,656,727

$ 1,722,311

$ 556,685

$ 4,935,723

Gross Margin

$ 1,063,753

$ 179,531

$ 1,836,333

Cost of caf cleaning

18,250

18,250

593,049

Purchasing cost
($65 x 2800; 2500; 2000)

182,000

162,500

$ 130,000

474,500

128,800

156,400

$ 147,200

432,400

187,500

175,000

$ 125,000

487,500

91,184

Receiving cost
($92 x 1400; 1700; 1600)
Shelf-stocking cost
($12.50 x 15000; 14000; 10000)
Customer support
($0.15 x 124016; 115768; 368108)

18,603

17,365

Total S, G & A cost

516,903

511,265

Operating Income

546,850

81,784

Operating Income/Revenue

14.70%

3.50%

55,216

$ 475,666

$ 1,503,834

$ (296,135) $

332,499

-40.20%

4.90%

3 We recommend using the activity based costing because it allocates the cost of the resources that are used for the products.
The current technique does not show the losses that the caf has incurred because it assumed all of the indirect costs are driven by
the dollar amount of merchandise sold.
After creating the improved method, we were able to indentify that the caf actually requires higher percentages of purchasing,
receiving and shelf-stocking, and customer support. We are also able to determine the operating costs of the the product lines and
make better decisions on pricing and product mix decisions.

18-41

Physical units, inspection at various levels of completion, weighted-average process costing report

Work in process, beginning (40%)

Started during November
To account for

30%
20,000
100,000
120,000

Inspection:
60%
20,000
100,000
120,000

100%
20,000
100,000
120,000

Good units completed and transferred out

Normal spoilage
Abnormal spoilage (15,000 - normal spoilage)
Work in process, ending (70%)
Accounted for

75,000
10,200
4,800
30,000
120,000

75,000
12,600
2,400
30,000
120,000

75,000
9,000
6,000
30,000
120,000

( 20,000 (beginning inventory) +100,000 - 15,000 spoiled - 30,000 ending inventory = 75,000 )
( 12% x (100,000 - 15,000) = 10,200 )
( 12% x (120,000 - 15,000) = 12,600 )
( 12% x 75,000 = 9,000 )
2 There are three different amounts of normal and abnormal spoilage at different inspection points because
the spoilage is detected mutiple times throughout the process.
We can see at the 30% inspection point that the beginning inventory are mostly good units.
The beginning work in process and units that were started in the period are passed through inspection at 60%
And at 100% the finished units are inspected.
3
Flow of Production
Work in process, beginning
Started during curent period
To account for
Good units completed and transferred out
during current period:
Normal spoilage (60% inspection point)
(12,600 x 100%; 12,600 x 60%)
Abnormal spoilage (60% inspection point)
(2,400 x 100%; 12,600 x 60%)
Work in process, ending
(30,000 x 100%; 30,000 x 70%)
Account for
Equivalent units of work done to date

Work in process, beginning

Costs added in current period
Total costs to account for

Equivalent Units
Physical Units
Direct Materials
Conversion Costs
20,000
100,000
120,000
75,000

75,000

75,000

12,600

12,600

7,560

2,400

2,400

1,440

30,000

30,000

21,000

120,000

120,000

105,000

Total Production Direct

Conversion
Costs
Materials
Costs
$ 166,500 $ 64,000 $ 102,500
1,200,000
200,000
1,000,000
$ 1,366,500 $ 264,000 $ 1,102,500

Costs incurred to date

Divided by equivalent units of work done to date
Cost per equivalent unit
Assignment of costs
Good units completed and transferred out (75,000)
Costs before adding normal spoilage
Normal spoilage (12,600 units, 7,560 units)
Total costs of good nuits completed and transferred out
Abnormal spoilage (2,400 units, 1,440 units)
Work in process, ending (30,000 units, 21,000 units)
Total costs accounted for

264,000
1,102,500
120,000
105,000
$
2.20 $
10.50

$ 952,500
107,100
1,059,600
20,400
286,500
$ 1,366,500

(75,000 x $2.20) + (75,000 x 10.50)

(12,600 x $2.20) + (7,560 x 10.50)
(2,400 x 2.20) + (1,440 x 10.50)
(30,000 x 2.20) + (21,000 x 10.50)
$ 264,000 $ 1,102,500

14-39

Customer profitability and ethics

1 Order taking
Product handling
Delivery
Expedited delivery
Restocking
Vists to customers

customer batch-level
customer output-unit-level
customer batch-level
customer batch-level
customerbatch-level
customer sustaining-level

SR
Revenues at list price:
($50 x 250; 550; 320; 130; 450; 1,200)
Less: Returns
($50 x 20; 35; 0; 0; 40; 60)
Revenues (at actual price)
($50 x 230; 515; 320; 130; 410; 1140)
Cost of goods sold
($35 x 230; 515; 320; 130; 410; 1,140)
Gross margin
Customer-level operating costs:
Order taking
($30 x 6; 15; 8; 7; 20; 30)
Product handling
($2 x 250; 550; 320; 130; 450; 1,200)
Delivery
($0.50 x 420; 620; 470; 280; 806; 900)
Expedited delivery
($325 x 0; 6; 0; 0; 2; 5)
Restocking
($100 x 2; 1; 0; 0; 2; 6)
Visits to customers
Sales commissions
($25 x 6; 15; 8; 7; 20; 30)
Total customer-level operating costs
Customer-level operating income

(Calculations)

Customers
NS
SB

SM

WS

$ 12,500 $ 27,500 $ 16,000 $ 6,500 $ 22,500 $ 60,000

1,000

1,750

2,000

3,000

11,500

25,750

16,000

6,500

20,500

57,000

8,050
3,450

18,025
7,725

11,200
4,800

4,550
1,950

14,350
6,150

39,900
17,100

180

450

240

210

600

900

500

1,100

640

260

900

2,400

210

310

235

140

403

450

1950

650

1625

200
150

100
150

0
150

0
150

200
150

600
150

150
375
1,390
4,435
$ 2,060 $ 3,290 $

SR

Order taking
($14 x 6; $30 x 15; $14 x 8; $14 x 7;
$14 x 20; $14 x 30)
Total customer-level operating costs
Customer-level operating income

SRU

SRU

84

200
175
500
750
1,465
935
3,403
6,875
3,335 $ 1,015 $ 2,747 $ 10,225

NS

450

1,294
4,435
$ 2,156 $ 3,290 $

SB

112

SM

98

280

WS

420

1,337
823
3,083
6,395
3,463 $ 1,127 $ 3,067 $ 10,705

Based on the comparison of the customer-level operating incomes, Snark Corporation would approve of the reduction in
order costs because it had a profitable outcome.
For SRU, it remained the same because the actual cost is $30.

(Calculations)
Order taking
($30 x 3; 15; 3; 4; 5; 15)
Sales comission
($25 x 3; 15; 3; 4; 5; 15)
Total customer-level operating costs
Customer-level operating income

SR

SRU

90

450

75
375
1,225
4,435
$ 2,225 $ 3,290 $

NS

SB

90

120

SM

150

WS

450

75
100
125
375
1,190
770
2,578
6,050
3,610 $ 1,180 $ 3,572 $ 11,050

5 It is unethical because total costs increased and income decreases because of the increase order taking.
Snark Corporation should change the sales comission and base it on the units that the salespeople sold.