Brief 3
To: Ravi Thirumalaisamy, Ph.D.
Modern College of Business and Science instructor
From: Asila Al Busaidi, MBA Student
Date: September 11, 2014
Business Brief
Super bookstore is a store that is combination of a café, books shelf’s and music CD’s. They use the indirect cost of goods at every product line to allocate selling, general and admission, plus to measure the capacity of sales. In addition to increase their sales, they are willing to change the price of the product line plus the management cost, therefore, they are wondering whether the information that they got at their accounting system is good enough to make them take such a decision or not.
The indirect cost of selling, general and admin is allocated to the current accounting system to all product line. They used merchandise cost to assign cost of books, CD’s and café.
Analysis
There was a significant cost differences between the old allocation method and the ABC method for any of the product lines, as it showed in appendix 1, the total percentage of the old allocation method for books was 54% while the ABC method is 35%, which makes it the difference of 19% between them. The CD’s percentage made difference of 1%, which counts as the lowest percentage differences. Moreover, the café was 11% and it increased up to 31% in the ABC method, which makes it 20% difference between the old allocation method and ABC method. However, the cost was divided into cost of café cleaning, merchandise cost, purchasing and cost of customer support.
Conclusion
As a conclusion, the bookstore should combine the two allocations, since it showed better results in books and CD’s at old allocation method, but less effective on café. The efficiency of ABC method had shown in the café only, which gives the old allocation method more point to be taken or applied instead of ABC method.
However, I recommend the ABC method as it will assign indirect cost on the product line, plus the activities that raise the cost. The
Modern College of Business and Science instructor
From: Asila Al Busaidi, MBA Student
Date: September 11, 2014
Business Brief
Super bookstore is a store that is combination of a café, books shelf’s and music CD’s. They use the indirect cost of goods at every product line to allocate selling, general and admission, plus to measure the capacity of sales. In addition to increase their sales, they are willing to change the price of the product line plus the management cost, therefore, they are wondering whether the information that they got at their accounting system is good enough to make them take such a decision or not.
The indirect cost of selling, general and admin is allocated to the current accounting system to all product line. They used merchandise cost to assign cost of books, CD’s and café.
Analysis
There was a significant cost differences between the old allocation method and the ABC method for any of the product lines, as it showed in appendix 1, the total percentage of the old allocation method for books was 54% while the ABC method is 35%, which makes it the difference of 19% between them. The CD’s percentage made difference of 1%, which counts as the lowest percentage differences. Moreover, the café was 11% and it increased up to 31% in the ABC method, which makes it 20% difference between the old allocation method and ABC method. However, the cost was divided into cost of café cleaning, merchandise cost, purchasing and cost of customer support.
Conclusion
As a conclusion, the bookstore should combine the two allocations, since it showed better results in books and CD’s at old allocation method, but less effective on café. The efficiency of ABC method had shown in the café only, which gives the old allocation method more point to be taken or applied instead of ABC method.
However, I recommend the ABC method as it will assign indirect cost on the product line, plus the activities that raise the cost. The