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ABC plc, a group operating retail stores, is compiling its budget statements for the next year. In this exercise revenues and costs at each store A, B and C are predicted. Additionally, all central costs of warehousing and a head office are allocated across the three stores in order to arrive at a total cost and net profit of each store operation. In earlier years the central costs were allocated in total based on the total sales value of each store. But as a result of dissatisfaction expressed by some store man- agers alternative methods are to be evaluated. The predicted results before any re-allocation of central costs are as follows: A В (£000) (£000) (000) Sales Costs of sales Gross margin Local operating expenses Variable 5000 4000 2300 1700 3000 1900 1100 2800 2200 660 700 840 730 310 500 290 Fixed 600 Operating profit 370 The central costs which are to be allocated are: (£000) Warehouse costs: Depreciation Storage Operating and despatch Delivery Head office: Salaries 100 80 120 300 200 Advertising Establishment Total 80 120 1000 The management accountant has carried out discussions with staff at all locations in order to identify more suitable 'cost drivers' of some of the central costs. So far the following has been revealed. A В Number of despatches Total delivery distances (thousand miles) Storage space occupied (%) 550 450 520 70 50 90 40 30 30 An analysis of senior management time revealed that 10% of their time was devoted to warehouse issues with the remainder shared equally between the three stores. 1. 2. It was agreed that the only basis on which to allocate the advertising costs was sales revenue. Establishment costs were mainly occupancy costs of senior management. 3. This analysis has been carried out against a background of developments in the com- pany, for example, automated warehousing and greater integration with suppliers.

ABC plc, a group operating retail stores, is compiling its budget statements for the next year. In this exercise revenues and costs at each store A, B and C are predicted. Additionally, all central costs of warehousing and a head office are allocated across the three stores in order to arrive at a total cost and net profit of each store operation. In earlier years the central costs were allocated in total based on the total sales value of each store. But as a result of dissatisfaction expressed by some store man- agers alternative methods are to be evaluated. The predicted results before any re-allocation of central costs are as follows: A В (£000) (£000) (000) Sales Costs of sales Gross margin Local operating expenses Variable 5000 4000 2300 1700 3000 1900 1100 2800 2200 660 700 840 730 310 500 290 Fixed 600 Operating profit 370 The central costs which are to be allocated are: (£000) Warehouse costs: Depreciation Storage Operating and despatch Delivery Head office: Salaries 100 80 120 300 200 Advertising Establishment Total 80 120 1000 The management accountant has carried out discussions with staff at all locations in order to identify more suitable 'cost drivers' of some of the central costs. So far the following has been revealed. A В Number of despatches Total delivery distances (thousand miles) Storage space occupied (%) 550 450 520 70 50 90 40 30 30 An analysis of senior management time revealed that 10% of their time was devoted to warehouse issues with the remainder shared equally between the three stores. 1. 2. It was agreed that the only basis on which to allocate the advertising costs was sales revenue. Establishment costs were mainly occupancy costs of senior management. 3. This analysis has been carried out against a background of developments in the com- pany, for example, automated warehousing and greater integration with suppliers.

Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter8: Budgeting For Planning And Control
Section: Chapter Questions
Problem 11CE: Shalimar Company manufactures and sells industrial products. For next year, Shalimar has budgeted...
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ABC plc, a group operating retail stores, is compiling its budget statements for the next year. In this exercise revenues and costs at each store A, B and C are predicted. Additionally, all central costs of warehousing and a head office are allocated across the three stores in order to arrive at a total cost and net profit of each store operation. In earlier years the central costs were allocated in total based on the total sales value of each store. But as a result of dissatisfaction expressed by some store man- agers alternative methods are to be evaluated. The predicted results before any re-allocation of central costs are as follows: A В (£000) (£000) (000) Sales Costs of sales Gross margin Local operating expenses Variable 5000 4000 3000 2800 2300 1700 1900 2200 1100 660 730 310 600 370 Fixed 700 500 Operating profit 840 290 The central costs which are to be allocated are: (£000) Warehouse costs: Depreciation Storage Operating and despatch Delivery Head office: Salaries 100 80 120 300 200 Advertising Establishment 80 120 Total 1000 The management accountant has carried out discussions with staff at all locations in order to identify more suitable 'cost drivers' of some of the central costs. So far the following has been revealed. A В Number of despatches Total delivery distances (thousand miles) Storage space occupied (%) 550 450 520 70 50 90 40 30 30 1. An analysis of senior management time revealed that 10% of their time was devoted to warehouse issues with the remainder shared equally between the three stores. 2. It was agreed that the only basis on which to allocate the advertising costs was sales revenue. 3. Establishment costs were mainly occupancy costs of senior management. This analysis has been carried out against a background of developments in the com- pany, for example, automated warehousing and greater integration with suppliers.
Transcribed Image Text:ABC plc, a group operating retail stores, is compiling its budget statements for the next year. In this exercise revenues and costs at each store A, B and C are predicted. Additionally, all central costs of warehousing and a head office are allocated across the three stores in order to arrive at a total cost and net profit of each store operation. In earlier years the central costs were allocated in total based on the total sales value of each store. But as a result of dissatisfaction expressed by some store man- agers alternative methods are to be evaluated. The predicted results before any re-allocation of central costs are as follows: A В (£000) (£000) (000) Sales Costs of sales Gross margin Local operating expenses Variable 5000 4000 3000 2800 2300 1700 1900 2200 1100 660 730 310 600 370 Fixed 700 500 Operating profit 840 290 The central costs which are to be allocated are: (£000) Warehouse costs: Depreciation Storage Operating and despatch Delivery Head office: Salaries 100 80 120 300 200 Advertising Establishment 80 120 Total 1000 The management accountant has carried out discussions with staff at all locations in order to identify more suitable 'cost drivers' of some of the central costs. So far the following has been revealed. A В Number of despatches Total delivery distances (thousand miles) Storage space occupied (%) 550 450 520 70 50 90 40 30 30 1. An analysis of senior management time revealed that 10% of their time was devoted to warehouse issues with the remainder shared equally between the three stores. 2. It was agreed that the only basis on which to allocate the advertising costs was sales revenue. 3. Establishment costs were mainly occupancy costs of senior management. This analysis has been carried out against a background of developments in the com- pany, for example, automated warehousing and greater integration with suppliers.
Required: As the management accountant prepare a report for the management of the group which: (a) Computes the budgeted net profit of each store based on the sales value allocation base originally adopted and explains 'cost driver', 'volume' and 'complexity' issues in relation to cost allocation commenting on the possible implications of the dissatisfaction expressed. (b) Computes the budgeted net profit of each store using the additional information provided, discusses the extent to which an improvement has been achieved in the information on the costs and profitability of running the stores and comments on the results.
Transcribed Image Text:Required: As the management accountant prepare a report for the management of the group which: (a) Computes the budgeted net profit of each store based on the sales value allocation base originally adopted and explains 'cost driver', 'volume' and 'complexity' issues in relation to cost allocation commenting on the possible implications of the dissatisfaction expressed. (b) Computes the budgeted net profit of each store using the additional information provided, discusses the extent to which an improvement has been achieved in the information on the costs and profitability of running the stores and comments on the results.
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