Midwest Office Products Case

4. Identify all costs, other than variable costs, for the sales representatives’ distribution strategy. Categorize these costs as investments and fixed costs (per sales representative and for fiscal 2005).

In using the ABC system, Valves and Pumps are matching the company’s target of 35% of gross margin apart from Flow Controllers. With the use of TAC, the gross margin on pump sales is 19.5% that well below the company's target gross margin of 35%. This indicates that the current overhead cost allocation practice did not reflect the real costs incurred on the products. The lower actual gross profit obtained was mainly due to wrong cost allocation on the pump product.

The Home Depot (Ticker: HD) is the world’s largest home-improvement retailer along with being an American Fortune 50 company. The company operates 2,259 retail building supply/home improvement “warehouse” type stores all across the United States, Canada and Mexico. The Home Depot has over 340,000 team members and is based in Atlanta, Georgia. The average store size is just over 100,000 square feet along with an additional 24,000 square feet set aside for seasonal gardening.

Management should note that the level of activity was above what had been planned for the month. This led to an expected increase in profits of $1,100. However, the individual items on the report should not receive much management attention. The favorable variance for revenue and the unfavorable variances for expenses are entirely caused by the increase in activity.

This type of cost system further allows the activities to be specifically tracked in each of the company’s markets.

Both the family, and the Wal-Mart acknowledge that the family was detained. The Wal-Mart associates believed that they had the right to stop the family based on the assumption of shoplifting, although they should not have physically restrained the family from advancing out of the store, nor denied Debra McCann’s offer of verifying the family’s identity.

This type of cost system further allows the activities to be specifically tracked in each of the company’s markets.

Second, the manufacturing order costs for non-stocked items was calculated by dividing total manufacturing order costs for non-stocked items by the number of orders for non-stocked products. Non-stocked products have additional costs associated with processing orders that went above and beyond the costs associated with a stocked product. The third step involved determining what the S"A allocation factor would be for calculating the S"A volume related costs. This allocation factor would then be applied to manufacturing COGS. The fourth and final step involved the calculation of the operating profit based on backing out volume related costs from sales revenues followed by deducting S"A and manufacturing order costs from the resulting gross margin to arrive at a operating profit.

In our second assumption, instead of using the cost of goods per cases in 1986, we try to use the percentage it counts in the total expenses which is 50.4% and to find the sales needed to break-even. The detail of the calculation is shown in the answer for questions d. The result is that 95,635, a little bit higher than the estimated sales of 90,000.

Under an ABC system, the allocation of costs to products is achieved through at least four analytical steps. Firstly, costs are grouped into activity levels. Secondly, cost drivers are

| The objectives are (1) audit of KCN’s financial statements for the year ended 12/31/05, and (2) issuance of a letter on compliance with covenants of the client’s letter of credit agreement.

One of the best aspects of the way the time-driven ABC system was put into place at Kemps was how efficiently and accurately management determined the main issues with the current cost system and responded with appropriate and relevant solutions. For example, one of the greatest problems the company was facing was that many of its operating costs were spread out equally over a customer base that was growing more diverse and demanding more personalized and varied service, effectively cutting or potentially eliminating entirely Kemps’ profit margins for a product. Therefore,

8. Using the ABC data, compute the average contribution to profit per account for both retail and business customers. What business strategy would be a manager using the ABC cost system likely adopt? How does this result compare to your response to Requirement 1, Part E?

Q3. How were the limitations of the existing cost system overcome by the ABC Cost System? What are the implications of the ABC system?

Abby Conroy was tasked with calculating an effective quote for Breeland Ltd., she chose the activity based accounting costing system since it more accurately captures the related costs. A special order was placed by Breeland Ltd. with Ace Fertilizer Company. The did not plan to order more of this product in the future. Based on Ace’s policy, the special order included disposal costs for any used materials in the event no other orders existed for the unused materials at the time the Breeland contract was signed. Abby correctly calculated the total direct material and labor costs and accurately arrived at the indirect costs using the ABC method and used cost activity pools that make sense for the company and