ABC plc, a group operating retail stores, is compiling its budget statements for the next year. In this exercise revenues and costs at each store A, B and C are predicted. Additionally, all central costs of warehousing and a head office are allocated across the three stores in order to arrive at a total cost and net profit of each store operation. In earlier years the central costs were allocated in total based on the total sales value of each store. But as a result of dissatisfaction expressed by some store man- agers alternative methods are to be evaluated. The predicted results before any re-allocation of central costs are as follows: A В (£000) (£000) (000) 5000 3000 1900 1100 Sales Costs of sales Gross margin Local operating expenses Variable Fixed Operating profit 4000 2300 1700 2800 2200 660 730 310 500 290 700 600 370 840 The central costs which are to be allocated are: (£000) Warehouse costs: Depreciation Storage Operating and despatch Delivery Head office: Salaries 100 80 120 300 200 Advertising Establishment Total 80 120 1000 The management accountant has carried out discussions with staff at all locations in order to identify more suitable 'cost drivers' of some of the central costs. So far the following has been revealed. A В Number of despatches Total delivery distances (thousand miles) Storage space occupied (%) 550 70 450 520 50 90 40 30 30 An analysis of senior management time revealed that 10% of their time was devoted to warehouse issues with the remainder shared equally between the three stores. 1. 2. It was agreed that the only basis on which to allocate the advertising costs was sales revenue. 3. Establishment costs were mainly occupancy costs of senior management. This analysis has been carried out against a background of developments in the com- pany, for example, automated warehousing and greater integration with suppliers.
ABC plc, a group operating retail stores, is compiling its budget statements for the next year. In this exercise revenues and costs at each store A, B and C are predicted. Additionally, all central costs of warehousing and a head office are allocated across the three stores in order to arrive at a total cost and net profit of each store operation. In earlier years the central costs were allocated in total based on the total sales value of each store. But as a result of dissatisfaction expressed by some store man- agers alternative methods are to be evaluated. The predicted results before any re-allocation of central costs are as follows: A В (£000) (£000) (000) 5000 3000 1900 1100 Sales Costs of sales Gross margin Local operating expenses Variable Fixed Operating profit 4000 2300 1700 2800 2200 660 730 310 500 290 700 600 370 840 The central costs which are to be allocated are: (£000) Warehouse costs: Depreciation Storage Operating and despatch Delivery Head office: Salaries 100 80 120 300 200 Advertising Establishment Total 80 120 1000 The management accountant has carried out discussions with staff at all locations in order to identify more suitable 'cost drivers' of some of the central costs. So far the following has been revealed. A В Number of despatches Total delivery distances (thousand miles) Storage space occupied (%) 550 70 450 520 50 90 40 30 30 An analysis of senior management time revealed that 10% of their time was devoted to warehouse issues with the remainder shared equally between the three stores. 1. 2. It was agreed that the only basis on which to allocate the advertising costs was sales revenue. 3. Establishment costs were mainly occupancy costs of senior management. This analysis has been carried out against a background of developments in the com- pany, for example, automated warehousing and greater integration with suppliers.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Concept explainers
Mortgages
A mortgage is a formal agreement in which a bank or other financial institution lends cash at interest in return for assuming the title to the debtor's property, on the condition that the obligation is paid in full.
Mortgage
The term "mortgage" is a type of loan that a borrower takes to maintain his house or any form of assets and he agrees to return the amount in a particular period of time to the lender usually in a series of regular equally monthly, quarterly, or half-yearly payments.
Question
Question a
Transcribed Image Text:ABC plc, a group operating retail stores, is compiling its budget statements for the
next year. In this exercise revenues and costs at each store A, B and C are predicted.
Additionally, all central costs of warehousing and a head office are allocated across
the three stores in order to arrive at a total cost and net profit of each store operation.
In earlier years the central costs were allocated in total based on the total sales
value of each store. But as a result of dissatisfaction expressed by some store man-
agers alternative methods are to be evaluated.
The predicted results before any re-allocation of central costs are as follows:
A
В
(£000)
(£000)
(000)
Sales
Costs of sales
Gross margin
Local operating expenses
Variable
5000
4000
3000
2800
2300
1700
1900
2200
1100
660
730
310
600
370
Fixed
700
500
Operating profit
840
290
The central costs which are to be allocated are:
(£000)
Warehouse costs:
Depreciation
Storage
Operating and despatch
Delivery
Head office:
Salaries
100
80
120
300
200
Advertising
Establishment
80
120
Total
1000
The management accountant has carried out discussions with staff at all locations
in order to identify more suitable 'cost drivers' of some of the central costs. So far
the following has been revealed.
A
В
Number of despatches
Total delivery distances (thousand miles)
Storage space occupied (%)
550
450
520
70
50
90
40
30
30
1.
An analysis of senior management time revealed that 10% of their time was
devoted to warehouse issues with the remainder shared equally between the
three stores.
2. It was agreed that the only basis on which to allocate the advertising costs was
sales revenue.
3. Establishment costs were mainly occupancy costs of senior management.
This analysis has been carried out against a background of developments in the com-
pany, for example, automated warehousing and greater integration with suppliers.
Transcribed Image Text:Required:
As the management accountant prepare a report for the management of the group which:
(a) Computes the budgeted net profit of each store based on the sales value allocation base originally adopted and
explains 'cost driver', 'volume' and 'complexity' issues in relation to cost allocation commenting on the possible
implications of the dissatisfaction expressed.
(b) Computes the budgeted net profit of each store using the additional information provided, discusses the extent
to which an improvement has been achieved in the information on the costs and profitability of running the
stores and comments on the results.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education