Total Store Support Cost

Total Cost of Goods Sold

Allocation Rate for Store Support Cost

3600000
12000000
0.3

Traditional Costing/Simple Costing

Soft Drink

Fresh Produce

(A) Revenue

3174000

8402400

Cost of Goods Sold

Store Support Cost

2400000
720000

6000000
1800000

(B) Total Cost

3120000

7800000

54000

602400

1.70

7.17

Operating Income (A-B)

Profit Margin (%)
(Operating income/Revenue)

Activity Based Costing

Calculation of Activity Rates

Activity
Ordering
Delivery

Cost Hierarchy
Batch level
Batch level

Self Stocking
Customer Support

Unit Level
Unit Level

Total Costs
624000
1008000
691000
1298800

Calculation of Profit through ABC

Soft Drink

Fresh Produce

(A) Revenue

3174000

8402400

Cost of Goods Sold

Bottle Return Cost
Ordering Costs
Delivery Costs
Self Stocking Costs
Customer Support Costs

2400000
48000
144000
96000
43200
100800

6000000
0
336000
700800
432000
883200

(B) Total Costs

2832000

8352000

342000

50400

Operating Income (A-B)

Profit Margin (%)

10.78

0.60

30%

(Operating income/Revenue)
1.53 ###

5.17 ###

Comparision
Fresh Produce
Packaged Food
Soft Drinks

Traditional
7.17%
3.30%
1.70%

ABC
0.60%
8.75%
10.78%

Soft Drink

Fresh Produce

19.33

51.18

20.00
100.00
23.08
9.52
6.25
8.20

50.00
0.00
53.85
69.52
62.50
71.88

Resource Categorisation
Revenue (%)
Cost of Goods Sold (%)
Bottle Return Cost (%)
Ordering Costs (%)
Delivery Costs (%)
Self Stocking Costs (%)
Customer Support Costs (%)

Packaged Food

Total

4839600

16416000

3600000
1080000

12000000
3600000

4680000

15600000

159600

816000

3.30

4.97

Cost allocation Base

624 purchase orders
1260 deliveries
3456 hours of self stocking
time
6,14,400 items sold

1000
800

Allocation Rate
Per purchase orders
Per deliveries
Per stocking hour

200
2

Per items sold

Packaged Food

Total

4839600

16416000

3600000
0
144000
211200
216000
244800

12000000
48000
624000
1008000
691200
1228800

4416000

15600000

423600

816000
8.75

4.97

4.89 ###

Packaged Food
29.48
30.00
0.00
23.08
20.95
31.25
19.92

4.43

Total Distribution Cost

Total Cases of Primium and Regular Wine Shipped
Distribution cost per case under existing system

Distribution Costs

Particulars
Delivery Costs
Rs. 8 x 2,40,000
Ordering Costs
Rs. 600 x 10 orders x 10 distributors
Promotion Costs
Rs. 16,000 x 10 distributors
Total Costs

Regular
Total
Per Case
2556000
10.65

Regular
Total

Per Case

1920000

60000

0.25

160,000

0.67

2,140,000

4,260,000
400000
10.65

Premium
Total
Per Case
1704000
10.65

Premium
Total
Rs. 8 x 1,60,000

Per Case

1280000

Rs. 600 x 20 orders x 30 distributors

360000

2.25

Rs. 16,000 X 30 distributors

480,000

2,120,000

13

Activity
Costs $

Activity
Machine setups

425,000

Purchase ordering

10,000

Machining

6,000,000

Inspection
Packing and shipping

36,000
64,000
6,535,000

Activity
Activity
Machine setups

Rate
65.38

Purchase ordering

100

Machining
Inspection
Packing and shipping

80
30
40

K33
Direct material cost

$30.00

Direct labor cost

Support cost
Unit cost

24
8.37
$62.37

The direct material cost and direct labor cost are obviously much higher for K88 than for K33.
Examination of the support costs shows that machining costs are the same per unit for bot
The higher support costs for K88 result from the relatively large number of machine

The company can consider the trade-offs in running K88 in larger batches and possibly maintaining large
Running larger batches would reduce the number of machine setups and inspections, and possibly the num
The company should realize, however, that such operational changes might not provide immediate financial imp

Activity
Cost Driver

Activity Cost
Driver
Rate $

Practical
Capacity

Setup hours

6,500

Number of orders

100

Machine hours

75,000

80.00

Number of batches
Number of shipments

1,200
1,600

30.00
40.00

65.38
100.00

Cost Driver Units

Cost Assigned to

K33

K88

2,000

4,200

25

50

40,000
400
80

15,000
600
1,500

K33
130760
2500
3200000
12000
3200

Total

3,348,460

Per Unit

8.37

K88
$45.00
60
10.38
$115.38

much higher for K88 than for K33.

chining costs are the same per unit for both products, but the other support costs are three to four t
relatively large number of machine setups, purchase orders, inspections (batches),and s

in larger batches and possibly maintaining larger inventories.

hine setups and inspections, and possibly the number of purchase orders.
hanges might not provide immediate financial improvements if capacity for these activities remains the same if not use

Cost Assigned to
K88
274596
5000
1200000
18000
60000
1557596
10.38

upport costs are three to four times higher per unit for K88 than for K33.
s, inspections (batches),and shipments.

activities remains the same if not used profitably.