ABC COSTING

IN HOT AND
COLD CAFE

SUBMITTED BY:
HOT AND COLD CAFE

 Hot & Cold merchandised and sold food items

 Soft Drinks
 Fresh Produce
 Packaged Items

 Used traditional approach for costing

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GOALS AND ISSUES

 Increased Demand

 Planned to Expand

 Pricing strategy which would maximize their profits

 Allocation of a planned increase in floor space

 Competitors providing the soft drinks at a 5% discount

 Low margin for soft drinks as per tradional costing

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DATA FOR 2017 FOR EACH PRODUCT LINE

Soft Drinks Fresh Produce Packaged Food

Revenues $317,400 840200 4,83,960

Cost of goods sold $240,000 600000 3,60,000

Cost of bottles returned $ 4800 0 0

Number of purchase orders placed 144 336 144

Number of deliveries received 120 876 284

Hours of shelf-stocking time 216 2160 1080

Items sold 50,400 4,41,600 1,22,040

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ACTIVITY BASED COSTING

 Identifies all of the specific overhead operations related to the manufacture of each product

 Not all products require the support of all overhead costs

 Not reasonable to apply the same overhead costs to all products

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Activity (1) Description of Activity (2) Total Support Costs (3) Cost-Allocation Base (4)

Direct tracing to soft-drink

Bottle returns Returning of empty bottles to store $ 4,800 line

Ordering Placing of orders for purchases $ 62,400 624 purchase order

Delivery Physical delivery and receipt of merchandise $100,800 1,260 deliveries

3,456 hours of shelf-stocking

Shelf-stocking Stocking of merchandise on store shelves and ongoing restocking $ 69,120 time

Customer
support Assistance provided to customers, including checkout and bagging $122,880 614,400 items sold

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COMPARISON OF PROFIT MARGINS BY DIFFERENT METHODS

Chart Title
12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
Fresh produce Packaged food Soft drinks

Simple Costing System ABC System

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COMPARISON OF ACTIVITY OVERHEAD AMONG DIFFERENT
CATEGORIES

Soft Drinks Fresh Produce Packaged Food

Revenues 19.34% 51.18% 29.48%

Cost of goods sold 20 50 30

Bottle returns 100 0 0

Activity areas:

Ordering 23.08 53.84 23.08

Delivery 9.53 69.52 20.95

Shelf-stocking 6.25 62.5 31.25

Customer support 8.2 71.88 19.92

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OBSERVATIONS

 Soft drinks have fewer deliveries and require least shelf-stocking time and customer support

 Fresh produce area has the most deliveries and consume a large percentage of shelf-stocking time

 Traditional approach proved to be inaccurate

 Relative to cost of goods sold, soft drinks and packaged food use fewer resources while fresh produce uses more
resources
 the ABC system reduces the costs assigned to soft drinks and packaged food and increases the costs assigned to fresh
produce

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RECOMMENDATIONS

 An increase in the percentage of space allocated to soft drinks

 Soft drink has high margin (10.78%)

 Hence, flexibility to reduce price with respect to competitors

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THANK YOU

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