MANAGEMENT ACCOUNTING

CASE STUDY

CASE DESCRIPTION
S K Store wants information about profitability of individual product lines: Soft Drinks,
Fresh Products, and Packaged food. S K Store provides the following data for the year
2002-2003 for each product line.
Particulars

Soft Drinks

Revenues
COGS
Cost of Bottle returned
Number of purchase order placed
Number of deliveries received
Hours of shelf-stocking time
Items sold

Rs. 7,93,500
Rs. 6,00,000
Rs. 12,000
360
300
540
1,26,000

Fresh Produce
Rs. 21,00,600
Rs. 15,00,000
Rs. 0
840
2,190
5,400
11,04,000

Packaged Food
Rs. 12,09,900
Rs. 9,00,000
Rs. 0
360
660
2,700
3,06,000

S K Store also provides the following information for the year 2002-2003.
Activity

Description of activity

Total Cost
(Rs.)

Cost allocation base

Bottle Returns

Returning of empty bottles

12,000

Direct tracing to soft drink line

Ordering

Placing of orders for purchases

1,56,000 1560 purchase orders

Delivery

Physical delivery and receipt of goods

2,52,000 3150 deliveries

Shelf Stocking

Stocking of goods on store shelves and on-going restocking 1,72,800 3640 hours of shelf stocking time

Customer Support

Assistance provided to customers including checkout

3,07,200 1536000 items sold

QUESTION 1
S K Store Currently allocated support cost (all cost other than cost of goods sold) to
product lines on the basis of cost of goods sold of each product line. Calculate the
operating income and operating income as a %age of revenues of each product line.
Total Overhead cost
Activity

Rs.

Bottles Return

12,000

Ordering

1,56,000

Delivery

2,52,000

Shelf Stocking

1,72,800

Customer Support

3,07,200

Total Overhead Cost

9,00,000

Total Cost of goods sold = Rs 6,00,000 + Rs 15,00,000 + Rs 9,00,000 = Rs. 30,00,000

Overhead Cost as per cost of goods sold =

Rs. 9,00,000
Rs. 30,00,000

=Rs. 0.3 per COGS

QUESTION 1
Statement of Cost
Soft Drinks

Fresh Produce

Packaged Foods

Revenues

Rs. 7,93,500

Rs. 21,00,600

Rs. 12,09,900

Cost of goods sold

Rs. 6,00,000

Rs. 15,00,000

Rs. 9,00,000

600000 x 0.30
Rs. 1,80,000

1500000 x 0.30
Rs. 4,50,000

900000 x 0.30
Rs. 2,70,000

Rs. 7,80,000

Rs. 19,50,000

Rs. 11,70,000

Rs. 13,500

Rs. 1,50,600

Rs. 39,900

1.70%

7.17%

3.30%

Over head cost

@ 0.30 per COGS
Total Cost
Operating Income
Oprating Income as % of
revenues

QUESTION 2
If S K Store allocates support cost (all cost other than cost of goods sold) to product
lines using an activity based costing system. Calculate the operating income and
operating income as a %age of revenues of each product line.
Particulars
Revenues
COGS
Cost of Bottle returned
Number of purchase order placed
Number of deliveries received
Hours of shelf-stocking time
Items sold

Soft Drinks
Rs. 7,93,500
Rs. 6,00,000
Rs. 12,000
360
300
540
1,26,000

Fresh Produce
Rs. 21,00,600
Rs. 15,00,000
Rs. 0
840
2,190
5,400
11,04,000

Packaged Food
Rs. 12,09,900
Rs. 9,00,000
Rs. 0
360
660
2,700
3,06,000

Calculating per unit rate for Activity Based Costing System

Activity
Bottle Returns
Ordering
Delivery
Shelf Stocking
Customer Support

Total Cost (Rs.)

Rs. 12,000
Rs. 1,56,000
Rs. 2,52,000
1,72,800
3,07,200

Cost allocation base

Direct tracing to soft drink line
1560 purchase orders
3150 deliveries
3640 hours of shelf stocking time
1536000 items sold

Cost Driver per unit rate

Rs. 100.00
Rs. 80.00
Rs. 20.00
Rs. 0.20

QUESTION 2
Statement of Cost
Soft Drinks

Fresh Produce

Packaged Foods

Revenues

Rs. 7,93,500

Rs. 21,00,600

Rs. 12,09,900

Cost of goods sold

Rs. 6,00,000

Rs. 15,00,000

Rs. 9,00,000

Cost of bottles returned

Rs. 12,000

Rs. 0

Rs. 0

Purchase order cost

@ 100 per purchase order

360 orders

840 orders

360 orders

Rs. 36,000

Rs. 84,000

Rs. 36,000

300 deliveries

2190 deliveries

660 deliveries

Rs. 24,000

Rs. 1,75,200

Rs. 52,800

540 hours

5400 hours

2700 hours

Rs. 10,800

Rs. 1,08,000

Rs. 54,000

126000 items sold

1104000 items sold

306000 items sold

Rs. 25,200

Rs. 2,20,800

Rs. 61,200

Rs. 7,08,000

Rs. 20,88,000

Rs. 11,04,000

Rs. 85,500

Rs. 12,600

Rs. 1,05,900

10.78%

0.60%

8.75%

Delivery cost
@80 per delivery
Shelf stocking cost
@ 20 per stocking hour
Customer support cost @0.20 per
item sold
Total Cost
Operating Income
Oprating Income as % of revenues

QUESTION 3
Comment on your answers in requirements (i) and (ii).
Different Operating Income and Operating income as a % age of revenues.
due to difference in overhead cost
Traditional Approach
ABC System

Soft Drinks
Rs. 1,80,000
Rs. 1,08,000

Fresh Produce
Rs. 4,50,000
Rs. 5,88,000

Packaged Foods
Rs. 2,70,000
Rs. 2,04,000

Total
Rs. 9,00,000
Rs. 9,00,000

Overhead cost in activity based costing is more reliable than the traditional approach

Difference in overhead is due to

Allocation of return cost to soft drinks (as compared to proportional distribution

in traditional approach),
allocation of order cost on the basis of number of orders,
allocation of delivery cost on the basis of number of deliveries,
allocation of Shelf stocking cost on the basis of hours stocked and
allocation of support cost on the basis of Items sold

QUESTION 3
There is a decrease in overhead cost of soft drinks and packaged foods, and so the

operating profit and operating income as a percentage of revenues increased.

Soft Drinks

Fresh Produce

Packaged Foods

Change in Overhead cost

Rs. 72,000

Rs. 1,38,000

Rs. 66,000

Change in Oprating Income

Rs. 72,000

Rs. 1,38,000

Rs. 66,000

9.08%

6.57%

5.45%

Change in Oprating Income %age of revenues