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
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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…..
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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. |