The performance of the company and individual stores in June 2018 is typical of average monthly performance for the past six months.   For monthly performance reporting, the stores should be regarded as: Multiple Choice   cost centres   revenue centres   investment centres   profit centres

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Joe Blogs Trading (Pty) Ltd. owns two similarly sized Kwikspar stores in the greater Durban area, one in Westville and the other in Glenashley. Both stores operate three main departments: general groceries; fruit and vegetables; and a delicatessen which specialises in pre-cooked meals and imported cheeses. The stores are supported by an independent central office where Joe, who owns and manages the business is based together with an accountant and two administrative assistants who are responsible for all payroll, accounting and IT related activities of the company. Each store also employs a person to manage the general store administration to support the manager and operating departments. It is not economically feasible, however, to allocate that person's time to the different store departments.

Store managers are responsible for revenues and store level operating expenses, and store department supervisors in turn are responsible for the revenue and costs under their control. Any acquisition of plant and equipment, however, has to be approved by Joe.

Household incomes are coming under increasing pressure as is evident by store operating profit growth over the last six months not keeping pace with inflation. Joe is frustrated that the current monthly statements of profit and loss, which are consistent with external reporting, do not enable him to adequately analyse relative store performance and hence take steps to improve profitability. He has thus consulted the company's external auditor who has advised that a contribution format for monthly profit reporting be implemented immediately at store level and then also at departmental level once the necessary adjustments to the company’s accounting information systems have been effected.

The following statement, consistent with external financial reporting, has been prepared for June 2018 but it must now be restated the company as a whole and the two stores individually using a contribution format.

Statement of Profit and loss for Joe Blogs Trading (Pty) Ltd. for the month ended 30 June 2018

  R'000
Revenue 3,500
Cost of sales 2,814
Gross profit 686
Operating expenses 581
Operating profit 105

 

On further investigation, the following was established:

  1. The Glenashley store’s revenue and cost of sales amounted to R1,400,000 and R1,092,000 respectively.
  2. Operating expenses comprise rent, salaries, depreciation, advertising, repairs and maintenance, sales commission and central office costs.
  3. For June, central office costs totaled R120,000 and company policy has in the past been to allocate these costs to stores based on relative turnover.
  4. Apart from sales commission, other operating expenses tend to be relatively stable month to month despite fluctuating sales revenue.
  5. Whereas central office costs are common to both stores, the remaining operating expenses are traceable to the two stores.
  6. Sales commission is earned by the two store managers at the rate of 0.5% of monthly revenue.
  7. The Glenashley store’s total traceable operating expenses in June amounted to R173,000.

The performance of the company and individual stores in June 2018 is typical of average monthly performance for the past six months.

 

For monthly performance reporting, the stores should be regarded as:

Multiple Choice
  •  
    cost centres
  •  
    revenue centres
  •  
    investment centres
  •  
    profit centres
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