COST OBJECT:
PRODUCT LINE
Indirect Costs
Direct Costs
Store
Support
COGS
COGS
INDIRECT
COST
POOL
COST
ALLOCATION
BASE
DIRECT
COST
5-26 (15–20 min.) ABC, wholesale, customer profitability.
Ramirez Wholesalers operates at capacity and sells furniture items to four department-store chains
(customers). Mr. Ramirez commented, “We apply ABC to determine product-line profitability.
The same ideas apply to customer profitability, and we should find out our customer profitability
as well.” Ramirez Wholesalers sends catalogs to corporate purchasing departments on a monthly
basis. The customers are entitled to return unsold merchandise within a six– month period from the
purchase date and receive a full purchase price refund. The following data were collected from last
year’s operations:
Ordering Delivery Shelf-
Stocking
Customer
Support
Number of
Purchase Order
Number of
Deliveries
Hours of
Shelf-Stocking
Number of
Items Sold
Indirect Costs
Direct Costs
COGS
INDIRECT
COST
POOL
COST
ALLOCATION
BASE
COST OBJECT:
PRODUCT LINE
DIRECT
COST
Job 215
Job 325
Overhead allocated
Purchasing ($17.50 25; 8 orders)
$ 437.50
$140.00
Material handling ($8.75 10; 4 moves)
87.50
35.00
Machine maintenance ($11.30 40; 60 hours)
452.00
678.00
Product inspection ($7.875 9; 3 inspections)
70.88
23.63
Packaging ($5.25 15; 6 units)
78.75
31.50
Total
$1,126.63
$908.13
3. The manufacturing manager likely would find the ABC job-costing system more useful in
cost management. Unlike direct manufacturing labor costs, the five indirect cost pools are
systematically linked to the activity areas at the plant. The result is more accurate product costing.
The manufacturing manager can seek to reduce both the level of activity (fewer purchase orders,
less material handling) and the cost of each activity (such as the cost per inspection).
Marketing managers can use ABC information to bid for jobs more competitively because
ABC provides managers with a more accurate reflection of the resources used for and the costs of
each job.
5-29 (30 min.) ABC, product-costing at banks, cross-subsidization.
United Savings Bank (USB) is examining the profitability of its Premier Account, a combined
savings and checking account. Depositors receive a 7% annual interest rate on their average
deposit. USB earns an interest rate spread of 3% (the difference between the rate at which it lends
money and the rate it pays depositors) by lending money for home-loan purposes at 10%. Thus,
USB would gain $60 on the interest spread if a depositor had an average Premier Account balance
of $2,000 in 2014 ($2,000 * 3% = $60).
The Premier Account allows depositors unlimited use of services such as deposits, withdrawals,
checking accounts, and foreign currency drafts. Depositors with Premier Account balances of
$1,000 or more receive unlimited free use of services. Depositors with minimum balances of less
than $1,000 pay a $22-a-month service fee for their Premier Account.
USB recently conducted an activity-based costing study of its services. It assessed the following
costs for six individual services. The use of these services in 2014 by three customers is as follows:
Assume Lindell and Colston always maintain a balance above $1,000, whereas Welker always has
a balance below $1,000.
