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Question & Answer: Requirement 1. Suppose Mountainview Outiters uses cost of merchandise to allocate all S, G & A costs. Prepare budgeted product-line and…..

Requirement 1. Suppose Mountainview Outiters uses cost of merchandise to allocate all S, G & A costs. Prepare budgeted product-line and total company income statements Identify an improved method for allocating costs to the three product lines. Explain. Use the method for allocating S, G & A costs that you propose to prepare new budgeted product-line and total company income statements. Compare your results to the results in requirement 1. (Customer support and advertising have been linked very closely with store sales.) Write a memo to Mountainview Outfitters management describing how the improved system might be useful for managing the store. 2. 3. PrintDone

Requirement 1. Suppose Mountainview Outiters uses cost of merchandise to allocate all S, G & A costs. Prepare budgeted product-line and total company income statements Identify an improved method for allocating costs to the three product lines. Explain. Use the method for allocating S, G & A costs that you propose to prepare new budgeted product-line and total company income statements. Compare your results to the results in requirement 1. (Customer support and advertising have been linked very closely with store sales.) Write a memo to Mountainview Outfitters management describing how the improved system might be useful for managing the store. 2. 3. PrintDone

Expert Answer

 

Mountainview Outfitters
Budgeted Income Statement
For the Year Ended Dec.31,2017
Clothing Equipment Shoes Total
Revenues 1360000 1790000 810000 3960000
Cost of merchandise 808500 1200500 441000 2450000
S,G & A costs
808500/2450000*1323000 436590 436590
1200500/2450000*1323000 648270 648270
441000/2450000*1323000 238140 238140
Total costs 1245090 1848770 679140 3773000
Operating Income(Loss) 114910 -58770 130860 187000
Mountainview Outfitters
Budgeted Income Statement
For the Year Ended Dec.31,2017
Clothing Equipment Shoes Total
Revenues————————-1 1360000 1790000 810000 3960000
Cost of merchandise————2 808500 1200500 441000 2450000
S, G & A expenses :
Purchasing department expenses
On No.of purchase orders placed
220/540*334800;130/540*334800&190/540*334800 136400 80600 117800 334800
Receiving Dept. expenses
On No.of boxes received
460/1050*273000;220/1050*273000&370/1050*273000 119600 57200 96200 273000
Customer support expense
Based on revenues
1360/3960*198000;1790/3960*198000&810/3960*198000 68000 89500 40500 198000
Rent
On Sq.ft. of store space
4300/20000*340000;14000/20000*340000&1700/20000*340000 73100 238000 28900 340000
General Store advertising
Based on revenues
1360/3960*79200;1790/3960*79200&810/3960*79200 27200 35800 16200 79200
Store manager’s salary
On Cost of merchandise
808500/2450000*98000;1200500/2450000*98000&441000/2450000*98000 32340 48020 17640 98000
Total S,G & A expenses———–3 456640 549120 317240 1323000
Total costs————————2+3=4 1265140 1749620 758240 3773000
Operating Income————1-4=5 94860 40380 51760 187000
Improved method for allocating s,g & a costs to products is Activity Based Costing.
This method is more appropriate because of its accuracy in allocation.
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