Activity-Based Costing Term Paper

Excerpt from Term Paper :

ABC (Activity-Based Costing) system to assist Towels & More (T&M) management identifying the type of customer to focus out the three types of customers that the company is supplying its products. The T&M is a small and family company specializing in selling towels. The company sells its towels to three different types of stores that include Departmental Stores, Gift Shops and Specialty Retailers. Based on handsome revenues that the company has recorded over the years, the Chief Executive Officer (CEO) decides to expand the business. However, the small gift shops deliver the highest contribution margin, and the CEO is convinced that the gift shops are the appropriate retail outlets to pursue. The paper calculates the distribution costs and customer support assigned to the T&M's three types of customers to assist in the evaluation of the ABC technique for a customer selection.

Cost Allocation for the Three Categories of Customers

The cost analysis for the three type of customers is presented in Table 1 that shows the costs assigned to Department stores is 100% higher than the costs assigned to Specialty Shops, and Gift Shops. The major reason is that the total sales units of the Departmental Store are 100% higher than the sales units of Specialty Shops, and Gift Shops. Thus, the total costs for orders placed, sales calls and No of shipments for Departmental Stores are 100% higher than the total costs for Specialty Shops and Gift Shops. The total sales units for the three types of customers are 20,000. The calculation is presented below:

Departmental Stores

Specialty Shops

Gift Shops

Sales (units)

10,000

5,000

5,000

Total costs/No. Of orders places

(10,000/20000)*40.000

=20,000

(5,000/20000)*40.000

=10,000

(5,000/20000)*40.000

=10,000

Total costs/No. Of sales calls

(10,000/20000)*80,000

=40,000

(5,000/20000)*80.000

=20,000

(5,000/20000)*40.000

=10,000

Total costs/No. Of shipments

(10,000/20000)*120,000

=60,000

(5,000/20000)*120.000

=30,000

(5,000/20000)*40.000

=10,000

Table 1 below allocates costs on each of the three types of customers.

Table 1: Cost Analysis

Department Stores

Specialty Shops

Gift Shops

Total 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

Total costs/No. Of orders places

$20,000

$10,000

$10,000

$40,000

Total costs/No. Of sales calls

$40,000

$20,000

$20,000

$80,000

Total costs/No. Of shipments

$60,000

$30,000

$30,000

$120,000

Total Costs

$240,000

Recalculating the Cost Allocation using ABC

The paper recalculates the costs using ABC technique based on the information in the Table 1.

Table 2

Department Stores

Specialty Shops

Gift Shops

Total Customer Support & Distribution Costs

Activity Level

Activity Level

Activity Level

Total costs/No. Of orders places

$20,000

$10,000

$10,000

$40,000

Total costs/No. Of sales calls

$40,000

$20,000

$20,000

$80,000

Total costs/No. Of shipments

$60,000

$30,000

$30,000

$120,000

Total Costs

$120,000

$60,000

$60,000

$240,000

Revenues

$200,000

$100,000

$300,000

$600,000

Traceable and Allocated Costs (Total)

$120,000

$60,000

$60,000

$240,000

Contribution Margin "less customer support and distribution costs" for the approach 1 is presented in the Table 3 below.

Table 3

Department Stores

Specialty Shops

Gift Shops

Total 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

$600,000

Total costs/No. Of orders places

$20,000

$10,000

$10,000

$40,000

Total costs/No. Of sales calls

$40,000

$20,000

$20,000

$80,000

Total costs/No. Of shipments

$60,000

$30,000

$30,000

$120,000

Total Costs

$240,000

Contributing Margin

$360,000

Contribution Margin "less customer support and distribution costs" for the approach 2 is presented in the Table 4 below.

Table 4

Department Stores

Specialty Shops

Gift Shops

Total Customer Support & Distribution Costs

Activity Level

Activity Level

Activity Level

Total costs/No. Of orders places

$20,000

$10,000

$10,000

$40,000

Total costs/No. Of sales calls

$40,000

$20,000

$20,000

$80,000

Total costs/No. Of shipments

$60,000

$30,000

$30,000

$120,000

Total Costs

$120,000

$60,000

$60,000

$240,000

Revenues

$200,000

$100,000

$300,000

$600,000

Traceable and Allocated Costs (Total)

$120,000

$60,000

$60,000

$240,000

Contributing Margin

$80,000

$40,000

$240,000

$360,000

Contributing Margin Ratio

22%

11%

67%

Based on the information in the Table 4, the report recommends that the company should support customer of the Gift Shops because the company realizes $240,000 contributing margin from the total contributing margin, which is 67% of the total contributing margin. The Fig 1 reveals the illustration of the contributing ratio for all the three type of customers, and based on the information in the Fig 1, the company should pursue Gift…

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