Problem:
Activity-based costing, activity-based management, merchandising. Super Bookstore (SB) is a large city bookstore that sells books and music CDs, and has a café. SB operates at capacity and allocates selling, general, and administration (S, G & A) costs to each product line using the cost of merchandise of each product line. SB wants to optimize the pricing and cost management of each product line. SB is wondering if its accounting system is providing it with the best information for making such decisions.
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Super Bookstore
Product Line Information
For the Year Ended December 31, 2010
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Books
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CDs
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Café
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Revenues
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$3,720,480
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$2,315,360
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$736,216
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Cost of merchandise
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$2,656,727
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$1,722,311
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$556,685
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Cost of café cleaning
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-
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-
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$ 18,250
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Number of purchase orders placed
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2,800
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2,500
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2,000
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Number of deliveries received
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1,400
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1,700
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1,600
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Hours of shelf stocking time
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15,000
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14,000
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10,000
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Items sold
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124,016
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115,768
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368,108
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Super Bookstore incurs the following selling, general, and administration costs:
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Super Bookstore
Selling, General, & Administration (S, G & A) Costs
For the Year Ended December 31, 2010
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Purchasing department expenses
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$ 474,500
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Receiving department expenses
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432,400
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Shelf stocking labor expense
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487,500
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Customer support expense (cashiers and floor employees)
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91,184
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$1,485,584
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1. Suppose Super Bookstore uses cost of merchandise to allocate all S, G & A costs. Prepare product line and total company income statements.
2. Identify an improved method for allocating costs to the three product lines. Explain. Use the method for allocating S, G & A costs that you propose to prepare new product line and total company income statements. Compare your results to the results in requirement 1.
3. Write a memo to Super Bookstore's management describing how the improved system might be useful for managing Super Bookstore.