Costing
Q.1
Calculation of customer support and distribution costs associated with the three types of customers.
Distribution costs which are also commonly referred to as distribution expenses are the various expenses that come about as a result of the movement of goods from where they are produced to where they are consumed (Drury 2008). Distribution costs examples could include the salaries of sales men, the charges associated with parking, carriage outwards, charges related with warehousing etc.
Allocation of costs based on revenues
Departmental stores allocation
Rate allocation
Rate = overhead costs/base
Base = 10,000 units
Overhead costs = 150,000 * 0.5 = 75,000
Rate = 75,000/10,000 = $ 7.5 per unit
Allocation
Allocation= base units * overhead rate
10, 000 units * $ 7.5 per unit = $75, 000
Specialty shops allocation
Rate allocation
Rate = overhead costs/ base costs
Base= 5000 units
Overhead costs = 100,000 * 0.75 = 75000
Rate = 75000/10000 = $7.5 per unit
Allocation
Allocation= Base units * overhead rate
10000 * $ 7.5 per unit = 75, 000
Gift shops allocation
Rate allocation
Rate = overhead costs / base
Base = 5000 units
Overhead costs = $ 250, 000 * 0.8= 200,000
Rate = $200, 000/ 5000 units = $ 40 per unit
Allocation
Allocation = Base units * overhead rate
= 5000 units * $ 40 per unit = 200,000
Allocations using activity based costing (ABC)
Activity based costing involves first assigning costs to activities followed by assigning the costs to products. It is important to note that in assigning these costs, the use of activities by each product should be taken into consideration. In this regard, an activity should be taken to mean the various tasks the Organisation involve itself in the delivery of products (Blocker 2007).
Departmental stores
Computation based on per hour overhead rate
Overhead rate = 150, 000/activity level (* no. of units)
= 150,000/ 5*10,000
= $ 3 per hour
Specialty shops
Computation based on per hour overhead rate
Overhead rate = 100,000/ activity level * no. of units
= 100,000/45 * 5000
= $ 0.444 per hour
Gift shops
Computation based on per hour overhead rate
Overhead rate = 250,000/activity level * no. of units
= 250,000/ 250 * 5000
= $ 0.2 per hour
Q.2
The contribution margin less customer support and distribution costs:
Lal (2008) defines the contribution margin as the sales revenue remainder after the deduction of the variable expenses.
Contribution margin = sales revenue – variable cost
Contribution margin ratio = contribution margin/ sales
Approach 1
Department stores
Sales revenue = 150, 000
Variable costs = 75, 000
Contribution margin = 150,000- 75000 = $75000
Specialty shops
Sales revenue = 100,000; variable cost = 75,000
Contribution margin = 100,000 – 75, 000 = $25000
Gift shops
Sales revenue = 250,000; variable cost = 200000
Contribution margin = 250, 000 – 200,000 = $50,000
Approach 2 –Activity Based Costing- ABC
Departmental store
Sales revenue = 150,000; variable cost = rate per hour * no. of units
= $3per hour * 10000 = 30000
Contribution margin = 150,000 – 30000 = $120,000
Specialty shops
Sales revenue= 100000; variable cost = rate per hour * no. of units
= $ 0.44 per hour * 5000
= $ 2220
Contribution margin = 100000 – 2220 = $ 97,780
Gift shops
Sales revenue = 250 000; variable cost = rate per hour * no. of units
= $ 0.2 per hour * 5000 units
= $ 1000
Contribution margin = 250000- 1000 = $ 249000
Q. 3
The type of customer the company would support and the reason
Based on the contribution margin, the customer the company should support using the activity based costing is the one with the highest contribution margin. In this case the company should choose gift shops as they have a higher contribution margin than the other customers. The first approach however suggests that the company should select department stores as they have a higher contribution margin than the other customers.
References
Blocker, J.G. (2007). Essentials of Cost Accounting. READ BOOKS
Drury, C. (2008). Management and Cost Accounting. 7th Edition. Cengage Learning EMEA
Lal, J. (2008). Cost Accounting. McGraw-Hill
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