sandee star the owner of star bakery wants to know the profitability of each of her 544643
ABC and Selling and Administrative Expenses
Sandee Star, the owner of Star Bakery, wants to know the profitability of each of her bakery’s customer groups. She is especially interested in the State Institutions customer group, which is one of the company’s largest. Currently, the bakery is selling doughnuts and snack foods to ten state institutions in three states. The controller has prepared the following income statement for the State Institutions customer group:
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Star Bakery Income Statement for State Institutions Customer Group For the Year Ended December 31 |
|
|
Sales ($5 per case × 50,000 cases) |
$250,000 |
|
Cost of goods sold ($3.50 per case ×50,000 cases) |
175,000 |
|
Gross margin |
$75,000 |
|
Less: Selling and administrative activity costs |
94,750 |
|
Operating income (loss) contributed by State Institutions |
|
|
customer group |
($19,750) |
|
Activity |
Activity Cost Rate |
Actual Cost Driver Level |
Activity Cost |
|
Make sales calls |
$60 per sales call |
60 sales calls |
$3,600 |
|
Prepare sales orders |
10 per sales order |
900 sales orders |
9,000 |
|
Handle inquiries |
5 per minute |
1,000 minutes |
5,000 |
|
Ship products |
1 per case sold |
50,000 cases |
50,000 |
|
Process invoices |
20 per invoice |
950 invoices |
19,000 |
|
Process credits |
20 per notice |
40 notices |
800 |
|
Process billings and collections |
7 per billing |
1,050 billings |
7,350 |
|
Total selling and administrative activity costs |
$94,750 |
||
The controller has also provided budgeted information about selling and administrative activities for the State Institutions customer group. For this year, the planned activity cost rates and the annual cost driver levels for each selling and administrative activity are as follows:
|
Activity |
Planned Activity Cost Rate |
Planned Annual Cost Driver Level |
|
Make sales calls |
$60 per sales call |
59 sales calls |
|
Prepare sales orders |
10 per sales order |
850 sales orders |
|
Handle inquiries |
5.10 per minute |
1,000 minutes |
|
Ship products |
0.60 per case sold |
50,000 cases |
|
Process invoices |
1 per invoice |
500 invoices |
|
Process credits |
10 per notice |
5 notices |
|
Process billings and |
4 per billing |
600 billings |
|
collections |
You have been called in as a consultant on the State Institutions customer group.
1. Calculate the planned activity cost for each activity.
2. Calculate the differences between the planned activity cost and the State Institutions customer group’s activity costs for this year.
3. From your evaluation of the differences calculated in 2 and your review of the income statement, identify the non-value-adding activities and state which selling and administrative activities should be examined.
4. What actions might the company take to reduce the costs of non-value adding selling and administrative activities?
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