Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 1

Product Line Profitability Analysis Studemeir Paint&Floors (SPF) has experienced net operating losses in its Other Flooring Products line during the last few periods. SPF’s management team thinks that the store will improve its profitability if they discontinue the Other Flooring Products line. The operating results from the most recent period are:

	Paint&Paint Supplies	Carpet	Other Flooring Products
Sales	$285,000	$235,000	$175,550
Cost of goods sold	165,000	150,000	135,250

SPF estimates that store support expenses are approximately 28.5 percent of revenues. Harish Rana, SPF’s controller, states that not every sales dollar requires or uses the same amount of store support activities. He conducts a preliminary investigation and his results and analysis are as follows:

Activity (cost driver)	Paint&Paint		Other Flooring
	Supplies	Carpet	Products
Order processing (number of purchase orders)	110	200	25
Receiving (number of deliveries)	40	120	10
Inventory management (number of hours per delivery)	10	40	6
Customer support (hours required per sale)	0.50	8.50	0.25

Harish estimates activity-cost rates for each activity as follows:

Order processing	$135 per purchase order
Receiving	180 per delivery
Inventory management	30 per hour
Customer support	15 per hour

Required

1. Prepare a product-line profitability report for SPF under the current costing system.

2. Prepare a product-line profitability report for SPF using the ABC information the controller provides.

3. What new insights does the ABC system in requirement 2 provide to SPF managers?

Step 1 of 4

Activity based costing method which is commonly known as ABC method, is a costing method where indirect cost is assigned to product on the basis of activities identified, used in producing the product.