Solution manual introduction to management accounting 14e by horngren ch11

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 12 COVERAGE OF LEARNING OBJECTIVES LEARNING OBJECTIVE LO1: Describe the general framework for cost allocation LO2: Allocate the variable and fixed costs of service departments to other organizational units LO3: Use the direct and step-down methods to allocate service department costs to user departments LO4: Integrate service department allocation systems with traditional and ABC systems to allocate total systems costs to product or service cost objects LO5: Allocate costs associated with customer actions to customers LO6: Allocate the central corporate costs of an organization LO7: Allocate joint costs to products using the physical-units and relative-sales-value methods FUNDAMENTAL ASSIGNMENT MATERIAL A2 CRITICAL THINKING EXERCISES AND EXERCISES PROBLEMS CASES, NIKE 10K, EXCEL, COLLAB & INTERNET EXERCISES B1 26, 29 39, 40, 46 56 A1, A2, B2 32 47, 48, 49 59 A2 31 41, 42, 50, 51, 52 55, 60 A2, B3 28, 33, 34 43, 44, 45 55, 58, 60 A2, A3 27, 30 49 61 A4, B4 35, 36, 37 53 687 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 12 Cost Allocation 12-A1 (30-50 min.) The numerical answers for requirements and are in Exhibit 12-A1 Most students will favor the direct method because the final allocations are not affected significantly Special Note: As an example of rounding errors, reconsider footnote (4) in Table 12-A1 If fractions were used instead of percentages, the computations in footnotes (5) and (6) would be changed, and the allocations would become: 30/1080 100/1080 250/1080 600/1080 100/1080 Total x x x x x 950,000 950,000 950,000 950,000 950,000 = = = = = 26,389 87,963 219,907 527,778 87,963 950,000 688 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com EXHIBIT 12-A1 Total labor hours Percentage Employees Percentage Engineering hours Percentage Cost Driver General Finishing Factory Engiand Total Administration Cafeteria neering Machining Assembly Painting 1,080,000 30,000 100,000 250,000 600,000 100,000 100.0% 2.8% 9.3% 23.1% 55.5% 9.3% 650 50 100 450 50 100.0% 7.7% 15.4% 69.2% 7.7% 80,000 50,000 20,000 10,000 100.0% 62.5% 25.0% 12.5% Cost Drivers Method 1, Direct Method Total department overhead before allocation General factory administration Cafeteria Engineering Totals Method 2, Step-Down Method Total department overhead before allocation General factory administration Cafeteria Engineering Totals Total Engineering Labor Hours Employees Hours $950,000 (950,000) (150,000) $150,000 - $2,500,000 - - - - - - - - - -Not Given- - - - - - - - - - $ 250,000 $ 600,000 $100,000 25,000 112,500 12,500 (2,500,000) 1,562,500 625,000 312,500 $1,837,500 $1,337,500 $425,000 $950,000 (950,000) $150,000 26,600 (176,600) $2,500,000 - - - - - - - -Not Given- - - - - - - - - - 88,350 $219,450 $527,250 $88,350 13,598 27,197 122,207 13,598 (2,601,948) 1,626,217 650,487 325,244 $1,872,864 $1,299,944 $427,192 250 + 600 + 100 = 950; 250/950 x 950,000 = 250,000; 600/950 x 950,000 = 600,000; etc 100 + 450 + 50 = 600; 100/600 x 150,000 = 25,000; 450/600 x 150,000 = 112,500; etc 50 + 20 + 10 = 80; 50/80 x 2,500,000 = 1,562,500; 20/80 x 2,500,000 = 625,000; etc Rounding in (4), (5), and (6) can cause discrepancies of hundreds of dollars: 2.8% x 950,000 = 26,600; 9.3% x 950,000 = 88,350; etc 7.7% x 176,600 = 13,598; 15.4% x 176,600 = 27,196; etc 62.5% x 2,601,948 = 1,626,218; 25.0% x 2,601,948 = 650,487; etc 689 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 12-A2 (30-40 min.) To properly classify an assigned cost, it is necessary to specify the cost object For example, power cost is a direct cost if the cost object is the power department but an indirect cost if the cost objective is the maintenance department, the assembly department, or the display types Type of Cost Assignment per Exhibit 12-1 Example from Exhibit 12-23 Directly traced cost to Power cost in power department (power departments department is the cost object); $90,000 of direct costs of the maintenance department (maintenance department is the cost object); parts and direct labor costs in the assembly department (the cost object is the assembly department) Indirect costs allocated to General costs such as occupancy allocated to the departments maintenance and the assembly departments Service department costs Power department costs allocated to the allocated to other service maintenance department departments Service department costs Power costs allocated to the assembly allocated to producing departments; maintenance department costs departments allocated to the assembly department Producing department Since there is only one producing department, no costs allocated to other example exists producing departments Directly traced costs to Parts and direct labor costs in the assembly departments that an department organization can also trace directly to products and services Producing department All assigned costs of setup and assembly activities, costs that an organization including assembly supervisor salaries, machine allocates to products or depreciation, power, maintenance, and occupancy services 690 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Directly traced costs to service departments that an organization can also trace directly to customers Service department costs allocated to customers 10 Product/service costs assigned to customers In this problem requirement, we assume that Darling does not determine customer costs In this problem requirement, we assume that Darling does not determine customer costs In this problem requirement, we assume that Darling does not determine customer costs The assembly facility uses the step-down method Power department costs are first allocated to the maintenance service department and the assembly department before the maintenance department costs are allocated to the two major activities in the assembly department Direct costs Allocated general Costs** Allocated power department costs*** Allocated maintenance department costs**** Total Power General Maintenance Setup Department Costs Department Activity $ 60,000* $ 600,000 $ 90,000 $(600,000) 60,000 $120,000 $420,000 6,000 6,000 48,000 $(156,000) 52,000 $178,000 104,000 $572,000 $(60,000) * 10 x $600 + 10 x $600 + 80 x $600 ** 10 + 20 + 70 = 100; (10 ÷ 100) x $600,000; etc *** 10 + 10 + 80 = 100; (10 ÷ 100) x $60,000; etc **** 2,000 + 4,000 = 6,000; (2,000 ÷ 6,000) x $156,000; etc 691 Assembly Activity To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Cost per Driver Unit Parts Direct labor Setup activity Assembly activity Total Displays Cost per display Display Type A Driver Units _Cost $1,053,800 344,000 Display Type B Driver Units _Cost $ 575,000 303,000 Display Type C Driver Units Cost $239,700 123,000 $1,310 20 26,200 60 78,600 120 157,200 1,000 203,000 $1,627,000 100,000 1,800 365,400 $1,322,000 50,000 1,200 243,600 $763,500 15,000 203 $ 16.27 $ 26.44 $ 50.90 First, L.A Darling would decide what profitability measure it needs The most easily computed measure is the customer gross profit The more refined and difficult to compute measure assigns costs to serve to each customer, giving a more complete profitability profile We take time in our class discussion to describe, in general terms, how both of these measures are determined Exhibit 12-A2 can be used to describe both costing systems This exhibit shows Exhibit 12-23 (page 564) in Panel A and how product cost is incorporated in a refined customer profitability process model in Panels B and C 692 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Panel B shows how customer gross profit is determined Consider display type A How is the product cost of display type A is incorporated into the customer-profitability system? The unit gross profit for display type A is its price less the cost of goods sold of $16.27 from requirement number The total gross profit from sales of display type A to a customer is then the unit gross profit times the number of units sold Customer profitability is a function of the product mix purchased Many companies opt for this rather simple extension of the costing system because it is easy to understand and less costly to maintain than the more complex profitability system that incorporates costs to serve The major drawback of this system is its lack of costing accuracy if there is diversity among customers regarding their use of resources associated with the costs to serve Panel C shows the more complex profitability system incorporating costs to serve A company opts for this more complex system if the costs to serve vary substantially across its customer base Customer profitability is a function of the product mix purchased and the cost to serve This is the difference between the gross profit and the cost to serve To determine the costs to serve the three customers, L.A Darling would need to determine major activities required to serve the customers along with related cost-allocation bases Then for each activity, fixed- and variable-cost resources consumed would be assigned (directly traced or allocated) For each activity, the cost per unit of the cost-allocation base would be determined and then activity-cost pools would be allocated to the three customer objects based on the proportion of the cost allocation base used Finally, customer profitability would be determined by deducting the cost to serve from the customer gross profit 693 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com L.A Darling’s Refined Allocation System to Determine Customer Profitability Exhibit 12-A2 Panel A Exhibit 12-23, L.A Darling’s Product-Cost System Panel B L.A Darling’s Customer-Profitability System without Cost-to-Serve General Costs Power Department Power Occupancy (Plant) Maintenance Department MWH O Square Feet O Department Resources Assembly Supervisors Machines SUP M SUP O M SUP GP Display Type B = Price of B $26.44 GP Display Type C = Price of C $50.90 A B C B B B GP Display Type A = Price of A $16.27 Machine Hours M O C A Assembly Activity Setup Activity Parts Direct Labor Setups Machine Hours SA AA Parts SA AA Display Type A Product Cost = $16.27 Direct Labor SA AA Parts Direct Labor SA C Product Cost = $50.90 Assembly Department 694 A C Mix of WalMart Mix of Kmart WMGP KMGP WGGP WMGP KMGP WGGP Wal-Mart Profitability Kmart Profitability AA Display Type B Display Type C Product Cost = $26.44 A Mix of Walgreens Walgreens Profitability To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exhibit 12-A2 (Continued) Panel A Exhibit 12-23, L.A Darling’s Product-Cost System Panel C L.A Darling’s Customer-Profitability System with Cost-to-Serve Resources used by the three cost-to-serve activities General Costs Power Department Power Occupancy (Plant) Maintenance Department MWH O Square Feet O Department Resources Cost-to-Serve Activity Cost-to-Serve Activity Cost-to-Serve Activity Act Act Act Machine Hours Assembly Supervisors Machines SUP M SUP O M SUP M O Assembly Activity Setup Activity GP Display Type B = Price of B $26.44 GP Display Type C = Price of C $50.90 A B C B B B GP Display Type A = Price of A $16.27 C A Parts Direct Labor Setups Machine Hours SA AA Parts SA AA Display Type A Direct Labor SA AA Parts Direct Labor SA A C Mix of WalMart Mix of Kmart WMGP KMGP Mix of Walgreens WGGP Display Type B Display Type C Product Cost = $26.44 C AA WMGP Product Cost = $16.27 A Act Act Act KMGP Act Act Act WGGP Act Act Product Cost = $50.90 Wal-Mart Profitability Assembly Department 695 Kmart Profitability Walgreens Profitability Act To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 12-A3 (15-20 min.) Allocations are in millions: Divisions: Northern Midwest Texas-Oklahoma Total Actual Revenue Allocated Costs $120 200 280 $600 $ 10 14 $30 Northern's manager would probably be indifferent, Midwest's would be pleased, and Plain's would be displeased The major weakness of using revenue as a basis for cost allocation is that it often fails to portray underlying causeand-effect relationships The major point of this problem is to show how strange results occur when the costs being allocated to a given segment are dependent on the activity of some other segment The Texas-Oklahoma Division has done the most to reduce the unit cost of central services, but it is being charged with a heavier dose of common costs Indeed, Midwest may have received more rather than less attention because of its current competitive troubles Most of the central costs are discretionary Pinpointing causeand-effect relationships is hard Such costs are usually predetermined by management fiat or by budgeted revenue 696 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 12-55 (100 – 200 min.) Exhibits 12-55A and 12-55B show the calculation of customer gross margin percentage and customer cost-to-serve percentage for the customer types Exhibit 12-55 C shows a plot of customer gross margin percentage versus customer cost-to-serve percentage for the customer types Suggested strategies for profit improvement for the customer types follow Customer type - Mega stores These stores have the lowest cost-to-serve Profitability can be improved by focusing on a better product mix A quarter of the sales (cases) to these stores are from bulk and singles products – both of which have a negative gross margin A shift in mix towards more regular and fragile product types would improve profitability Customer type – Local small stores These stores have a product mix that contains a substantial amount (32%) of the negative gross margin products The same change in sales focus that applies to mega stores can be applied to local small stores But unlike mega stores, small stores are very costly to serve From Exhibit 12-55 B, the largest single cost to serve local small stores is truck deliveries The average number of cases per order (the same as per truck delivery) is 6,000,000 ÷ 80,000 = 75 Compare this to mega stores that average 7,680,000 ÷ 32,000 = 240 cases per order (delivery) This is a significant factor causing the high cost-to-serve 759 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com For example, suppose that the average order size could be increased from 75,000 to 150,000 cases If the total annual cases sold is unchanged (6,000,000), a total of 40 orders, a 50% reduction, would be made An estimate of the cost savings and the impact on the cost-to-serve percentage can be made as follows: Activity Truck delivery Order processing Regular scheduling Expedited scheduling Cost per Driver Unit (Exhibit 12-55B) $167.55 Reduction in Driver Units of 50% (000) 34 27.49 40 1,099.60 5.83 36 209.88 19.44 Total cost savings (000) Cost savings as a percent of revenue New cost-to-serve as a percent of revenue Cost Savings (000) $5,696.70 77.76 $7,083.94 24.9% 60.1% In addition to the above savings, other activities would also be impacted by the reduction in orders such as customer service So while the total impact of focusing on increasing order size can only be estimated, it is reasonable to expect dramatic cost savings from the current 85% of revenue Other factors should be investigated include the high level of corporate support and customer service 760 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Customer type – Local large stores Local large stores generate $68,400 ÷ $136,230 = 50% of DSI’s total revenue and with a net margin of 58% - 47% = 11% The key to local large store profitability is sales of a large percentage (80%) of regular product The cost-to-serve percentage is 47% This could be reduced as for customer type by increasing the order size from the current level of 14,400,000 ÷ 120,000 = 120 cases per order But a dramatic improvement should not be expected In general, local large stores are sustaining DSI’s business and their loyalty should be cultivated Customer type – Specialty stores Specialty stores have a low gross margin of 22% coupled with a very large cost-to-serve percent of 106%! Although these stores not account for a significant portion of DSI’s revenue the company should rationalize their business Several actions could be suggested One is to charge a premium for all high-security products The vast majority of these products are sold to specialty stores with only marginal sales to mega and local large stores Another action is to adopt a customer loyalty program based on volume of sales The list price of $7.25 per case would apply to customers with sales volumes less than a specified level Most of DSI’s customers would qualify for discounts (similar to those currently existing) so prices would not be significantly different For specialty stores, prices would increase dramatically This may result in losing specialty-store business so DSI needs to decide is this is a direction they wish to consider 761 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Customer Type Exhibit 12-55 A (Units and dollars are in thousands.) Product Regular Short Fragile Bulk High Security Singles Product mix percentage 60% 5% 5% 20% 5% 5% 100% Cases sold 4,608 384 384 1,536 384 384 7,680 Total Revenue $ 21,888 $ 1,824 $ 1,824 $7,296 Gross Profit per Case Total Gross Profit Product mix percentage Cases sold Total Revenue @ 4.75/case Gross Profit per Case Total Gross Profit Product mix percentage Cases sold $ 3.28 $ 15,114 50% 3,000 $ 14,250 $ 3.28 $ 9,840 80% 11,520 $ 1.58 $ 607 5% 300 $ 1,425 $ 1.58 $ 474 0% - $ 2.74 $ 1,052 5% 300 $ 1,425 $ 2.74 $ 822 10% 1,440 $(1.44) $(2,212) 30% 1,800 $ 8,550 $ (1.44) $(2,592) 10% 1,440 Total Revenue @ 4.75/case Gross Profit per Case Total Gross Profit Product mix percentage $ 54,720 $ 3.28 $ 37,786 10% $ $ 1.58 $ 20% $ 6,840 $ 2.74 $ 3,946 0% $ 6,840 $ (1.44) $(2,074) 0% $ 0.54 $ 70% - - 420 $ 1,995 $ $ 0.54 $ (5.30) $ 227 Gross Profit Total Percentage Cases sold Total Revenue @ 4.75/case 60 $ 285 120 $ 570 Gross Profit per Case $ 3.28 $ 1.58 Total Gross Profit $ 197 $ 190 $ $ 762 $ 2.74 - $ - $ (1.44) $ - $ 1,824 $36,480 35% $ 0.54 $ (5.30) $ 207 $(2,035) $12,733 8% 2% 100% 480 120 6,000 $ 2,280 $ 570 $28,500 $ 0.54 $ (5.30) $ 259 $ (636) $ 8,167 0% 0% 100% 14,400 29% $ 1,824 $ $ - $68,400 $ (5.30) $ - $39,658 0% 100% - $ 600 - $ 2,850 - $ 613 58% 22% To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Parcel Delivery Deliveries Truck Delivery Deliveries Shipping Pallets Expedited Scheduling Orders Regular Scheduling Orders Corporate Support Labor Hours Order Changes Number of Changes Customer Service Labor Hours Orders Customer Type Activity Order Processing Exhibit 12-55 B (Units and dollars are in thousands.) Cost/Driver Unit $27.49 $43.34 $32.63 $51.66 $5.83 $19.44 $6.60 $167.55 $23.89 Driver Units Cost to Serve 32 $879.68 18.7 $810.46 3.2 $104.42 - 29 $169.07 Cost Driver 416 $58.32 $2,745.6 25.6 $4,289.28 1.6 $38.22 Revenue (See Exhibit 12-55A) Cost-to-Serve Percentage Driver Units 80 Cost to Serve $2,199.2 100 $4,334 Total $9,095.05 $36,480.00 24.9% 20 $261.04 $1,033.2 72 $419.76 Revenue (See Exhibit 12-55A) $155.52 640 $4,224 68 $11,393.4 $191.12 $24,211.24 $28,500.00 Cost-to-Serve Percentage 85.0% 763 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Parcel Delivery Deliveries Truck Delivery Deliveries Shipping Pallets Expedited Scheduling Orders Regular Scheduling Orders Corporate Support Labor Hours Order Changes Number of Changes Customer Service Labor Hours Orders Customer Type Activity Order Processing Exhibit 12-55 B (continued) Cost/Driver Unit $27.49 $43.34 $32.63 $51.66 $5.83 $19.44 $6.60 $167.55 $23.89 Driver Units 120 70 2.4 80 108 12 840 90 $78.31 $4,132.8 $629.64 $233.28 $5,544 $15,079.5 $143.34 Cost Driver Cost to Serve $3,298.8 $3,033.8 Revenue (See Exhibit 12-55A) $32,173.47 $68,400.00 Cost-to-Serve Percentage Total 47.0% Driver Units 12 30 1.2 10 60 4.8 2.4 Cost to Serve $329.88 $1,300.2 $39.16 - $58.3 $38.88 $396 $804.24 $57.34 Revenue (See Exhibit 12-55A) $3,023.99 $2,850.00 Cost-to-Serve Percentage 106.1% 764 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exhibit 55-C CUSTOMER PROFITABILITY GROSS PROFIT PERCENTAGE 100% 90% 80% 70% 60% CT3, 47%, 58% 50% 40% 30% CT1, 24.9%, 34.9% CT2, 85%, 29% 20% CT4, 106%, 22% 10% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100 110 120 % % % COST-TO-SERVE PERCENTAGE 765 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 12-56 (50-60 min.) Systems Claims Department Claims Department First Department First Quarter Historical Quarter Budget Usage Budget Hardware and other capacity-related costs $150,000 Software development 141,750 Computer-related operations 189,000 Input/output-related operations 75,600 $556,350 50% 40 15 75 $ 75,000 56,700 28,350 56,700 $216,750 Solution is in Exhibit 12-56 a The new charging system should improve cost control in the Systems Department (if the rates are valid) because inefficiencies can no longer be passed on to the user departments Thus, the Systems Department would be forced to watch its costs closely b The recommended system for charging costs to user departments should improve planning and cost control in the user departments Decisions that affect capacityrelated costs will affect the allocation of those costs, while decisions affecting only short-run operating costs will affect the allocation of only the operating costs 766 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com EXHIBIT 12-56 Total First Quarter Systems Department Not Costs Allocated Total Hardware and other capacityrelated costs Software development Computer-related operations Input-output-related operations (1) $150,000 x 25 (2) $150,000 x 50 (3) $150,000 x 20 (4) $150,000 x 05 (5) $30 x 450 (6) $30 x 1,800 (7) $30 x 1,600 (8) $30 x 400 Records $155,000 $ 5,000 $150,000 130,000 2,500 127,500 187,000 3,000 184,000 78,000 (1,000) 79,000 $550,000 $ 9,500 $540,500 (9) $200 x 540 (10) $200 x 194 (11) $200 x 126 (12) $200 x 60 Outside $ 37,500 (1) $ 75,000 (2) $ 30,000 (3) $ 7,500 (4) 13,500 (5) 54,000 (6) 48,000 (7) 12,000 (8) 108,000 (9) 38,800 (10) 25,200 (11) 12,000 (12) 15,400 (13) 55,400 (14) 4,100 (15) 4,100 (16) $174,400 $223,200 $107,300 $35,600 (13) $10 x 1,540 (14) $10 x 5,540 (15) $10 x 410 (16) $10 x 410 767 Allocated Department Claims Finance To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 12-57 (60 or more) Before implementing the process modeling approach to ABC, AT&T allocated some billing costs on the basis of number of invoices produced The business billing center was selected for the pilot study at AT&T The overall goals of the pilot study from the managers’ perspective included gaining an understanding of the center’s operations and identifying value-adding activities Cost objects were the product and service types Activities included printing, sorting, dispatching, validating data, correcting errors, and monitoring the billing process Resources included labor pools, computers, facilities, and paper Cost drivers included square feet, pages printed, printer hours, and labor hours The “billing” activity (cost driver is “pages printed”) consumes billing labor time (cost driver is “labor hours”) at some rate If it takes labor hour for every 400 pages printed, the rate, or consumption characteristic is, 400 = 0.0025 labor hours per page AT&T considered the flowchart “critical” because it “revealed how the organization conducted business Managers were able to see how cost flows are a function of operations (activities) and how they (activities) consume costly resources.” Recall that this was one of the overall goals for the pilot study 768 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com From Exhibit 12-20, there were 20,000 inquiries (driver units) for the inquiry activity and each inquiry costs $13.806 for a total of $276,120 A similar calculation would be made for the billing and other activities The sum of these three activity costs is the total cost to support residential customers Using data from Exhibit 12-20, the percent of billing department costs associated with inquiry investigation (both account inquiry and correspondence) is $345,155.81 $687,500 = 50.2% Account inquiry associates were given access to additional operating systems allowing end-to-end responsibility for inquiry investigation Training was also given to associates in the use of these systems The elimination of referrals to other working groups resulted in reductions in investigation time, improved service, and cost reductions This is a good example of ABM how ABC is used to improve operations 769 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 12-58 (15-20 min.) Nike sells its products through various customer types including Nike-owned retail outlets such as Nike factory stores, Nike stores, NIKETOWNs, NIKE employee-only stores, Cole Haan stores, Converse stores, and Hurley stores Nike’s largest single customer in 2006 was Footlocker, Inc., accounting for 10% of consolidated sales To determine the profitability of Footlocker, Nike would need to develop a customer profitability model such as the one shown in Exhibit 12-16 of the text A chart similar to Exhibit 12-17 could then be constructed to compare Footlocker’s profitability to the other customer types and thus evaluate Nike’s strategy Exhibit 12-58 on the next page sketches a process map that shows the profitability model assuming that Nike chooses to separately allocate the cost to serve its customers 770 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exhibit 12-58 Process Map for Customer Profitability at Nike GROSS PROFIT PRODUCT GROSS PROFIT PRODUCT N ACTIVITY COSTS FOR COSTTO-SERVE MIX PROFIT FROM FOOTLOCKER PROFIT FROM OTHER RETAILERS PROFIT FROM NIKE RETAILERS 771 PROFIT FROM DISTRIBUTORS PROFIT FROM OTHER To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 12-59 (40-35 min.) For the solution, see the Prentice Hall Web site, www.prenhall.com/ 12-60 (100 or more) The purposes of this exercise are to conduct library research in the current management accounting literature and to gain a better understanding of activity-based costing and activity-based management Students must find their own article on ABC or ABM, and this will test their skills with library searches Using electronic search procedures is likely to be a time-saver, but names of journals are given so that someone could just browse the library holdings of one of the journals to find an appropriate article Textbooks are limited in the space they can devote to stories about actual cost-accounting systems This exercise requires students to deal with real-world issues relating to ABC or ABM All applications of ABC or ABM are not successful, either because it was not an appropriate techniques where applied or because of mistakes in implementation Although the literature will be dominated by success stories (companies not often advertise their failures), by looking at several companies who have implemented ABC or ABM, students should be able to make some of the generalizations called for in requirement By sharing information among group members, students should get a broader perspective on ABC and ABM than they would get from reading a single article 772 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 12-61 (30-40 min.) NOTE TO INSTRUCTOR This solution is based on the web site as it was in early 2007 Be sure to examine the current web site before assigning this problem, as the information there may have changed Sears and Kmart operate over 3,800 stores in all 50 states and Canada Sears Holdings uses three segments: Kmart, Sears Domestic, and Sears Canada The number of these companies listed in an area will be specific to the location of the school but in most cases both companies should operate close to the student and In the 10K report for 2006, the company reports data such as number of stores by geographic area and by segment On the notes to consolidated financial statements section for 2005, Sears Holdings provides segment operating revenues, costs and expenses, operating income, and total assets The segments operating incomes for 2005 sum to $767,000,000 + $909,000,000 + $448,000,000 = $2,124,000,000 The operating income on the 2005 income statement is $2,124,000,000 These amounts are the same, indicating that the company allocates 100% of its operating expenses to segments The percent of selling and administrative costs allocated to segments is shown in Exhibit 12-61 Exhibit 12-61 Allocation of Selling and Administrative Expenses Cost-Allocation Basis Actual “bases” used* Revenue Number of stores Percent of Selling and Administrative Costs Allocated to: Kmart Sears Domestic Sears Canada 3,804 ÷ 10,759 = 35% 5,968 ÷ 10,759 = 55% 987 ÷ 10,759 = 9% 19,094 ÷ 49,124 = 39% 25,868 ÷ 49,124 = 53% 4,162 ÷ 49,124 = 8% 1,416 ÷ 3,843 = 37% 2,052 ÷ 3,843 = 53% 375 ÷ 3,843 = 10% * The actual cost-allocation system is more complex than implied here but the results are not too different for 2005 than if a simple allocation base such as revenue or number of stores was used 773 ... traced costs to service departments that an organization can also trace directly to customers Service department costs allocated to customers 10 Product/service costs assigned to customers In this... gross profit and the cost to serve To determine the costs to serve the three customers, L.A Darling would need to determine major activities required to serve the customers along with related... CTS $13,000 CUSTOMER TYPE CUSTOMER TYPE 705 COST TO SERVE $15,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 2-4 CUSTOMER TYPE Total Percent