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    ABC Method of allocating cost

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    Activity Based Costing

    Below find Millie's income statement.
    Millie's Linen Company
    For the year ended 12-31-XX

    Sales $500,000
    Variable Production Costs 150,000
    Contribution Margin $350,000
    Fixed Costs:
    Production Overhead $120,000
    Sellling & Distribution Costs 180,000 300,000
    Net Operating Income $50,000
    ======
    Customer support & distribution costs are high. The total amount was $180,000 last year. The CEO suggested that you are brought in as a consultant to prepare an analysis. He suggests that the company analyze overhead costs associated with supporting different types of customers.
    The table below provides some information that may be pertinent for the analysis.

    Description Customer Support & Distribution Costs Department Stores
    Activity Level Specialty Shops
    Activity Level Gift Shops
    Activity Level
    Sales (units) 10,000 5,000 5,000
    Revenues $150,000 $100,000 $250,000
    Contribution margin ratio 50% 75% 80%
    No of customers 5 45 250
    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

    Objective:
    Be able to calculate the customer support and distribution costs associated with the three types of customers by first using a simple strategy to allocate the costs based on revenues and then by recalculating the allocations using activity based costing (ABC). Determine contribution margin less customer support and distribution costs for both approaches above and identify which customer should the company support and why? According to the analysis.

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    Dear student,

    Departmental stores provide more profit under activity based costing system and CEO should give more support to Departmental stores to make overall profit and fewer efforts can be given to specialty shops and gift shops as both ...

    Solution Summary

    The expert examines ABC method of allocating costs.

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