refer to the cost
of resources used by multiple divisions, departments, or another type of grouping. These types of overhead costs
are not only incurred within a profit center, but in many other parts of the organization. One example is overhead or common fixed costs
for distribution and client support. We're using the latter for some hands-on experience in allocating common costs
and analyzing the implications for T&M. Information follows below.
Towels & More (T&M) is a small family company that produces and sells towels. T&M sells the towels to three types of stores: major retailers, specialty retailers and gift shops. The company is doing well and the CEO wants to expand the business. The contribution margin ratio is the highest for the small gift shops, so the CEO feels that those are the type of retail outlets to pursue.
Below find T&M?s income statement for last year.
Towels and More
For the year ended 12-31-20XX
Variable Production Cost
Contribution Margin $420.000
Production Overhead $120,000
Selling and Distribution Cost
Net Operating Cost
Customer support & distribution costs
are pretty high at T&M. The total amount was $240,000 last year. The marketing manager has recently been to a seminar and learned about applying ABC to analyze customer and distribution costs
. He suggests that the company analyze overhead costs
associated with supporting different types of customers before proceeding with an expansion. The marketing manager knows that the small shops require a lot of attention and is somewhat dubious about the CEO's proposed strategy. The CEO accepts the suggestion and you are brought in as a consultant to prepare the analysis. The table below provides some information that may be pertinent for the analysis.
Department Stores Specialty Shops Gift Shops
Description Customer Support & Distribution Costs
Activity Level Activity Level Activity Level
Sales (units) 10,000 5,000 5,000
Revenues $200,000 $100,000 $300,000
Contribution margin ratio 50% 80% 80%
No. of customers 5 45 250
/No. of orders places $40,000 10 90 900
/No. of sales calls $80,000 5 195 800
/No. of shipments $120,000 20 480 1,000
Note that the contribution margin ratio varies due to different quality of towels sold to the stores.
? Calculate the customer support and distribution costs
associated with the three types of customers.
o Use a simple strategy first and allocate the costs
based on revenues.
o Recalculate the allocations using activity based costing
(ABC) based on the information in the table above.
? Determine contribution margin less customer support and distribution costs
for both approaches above.
? Which type of customer should the company support and why? Refer to your analysis in your response.
? What are the characteristics of companies that may benefit from an ABC allocation system?
It is important to answer the questions as posed. The discussion should be 5 pages and written in a clear and concise manner. Support your discussion with references in APA format. You are encouraged to use Excel or other compatible spreadsheets when computations are involved.
Kaplan, R. S. (1992). In defense of activity-based cost
management. Management Accounting, 74(5), 58-58.
Stratton, W. O., Desroches, D., Lawson, R. A., & Hatch, T. (2009). Activity-based costing
: Is it still relevant? Management Accounting Quarterly, 10(3), 31-40.
Read one of the following:
Martin, J. R. (n.d.) Management Accounting: Concepts, Techniques, and Controversial Issues - Chapter 7: Activity Based Costing
. Retrieved from http://maaw.info/Chapter7.htm
Walther, l. (2012). Chapter Twenty. Process Costing
and Activity-Based Costing
. Retrieved (including video lecture) from http://www.principlesofaccounting.com/ Concentrate on the topic of ABC.
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