Management Accounting 1

You are a management accountant at Delots Management Consultants. You have been approached by Pharmaguard Ltd regarding implementing Activity-based Costing (ABC) in its retail operations. The company has three main market segments:

• General supermarket chains

• Pharmacy chains

• Pharmacist-owned single stores

For many years, Pharmaguard has used gross margin percentage [(Revenue - Cost of goods sold) ÷ Revenue] to evaluate the relative profitability of its market segments.

Pharmaguard’s segmental profit information for 2015 is given below:

 

Pharmaguard Ltd, 2015 General supermarket chains Pharmacy chains Pharmacist-owned single stores Pharmaguard Ltd

Revenues $3 708 000 $3 150 000 $1 980 000 $8 838 000

Cost of goods sold 3 600 000 3 000 000 1 800 000 8 400 000

Gross margin $108 000 $150 000 $180 000 438 000

Other operating costs 301 080

Operating profit $136 920

 

 

 

 

 

 

 

In your meetings with Pharmaguard staff, you have undertaken a value or activity analysis, where you have classified activities as value-added or non-value added. You have identified the five key activities that drive other operating costs at Pharmaguard:

 

Activity area Cost driver

Order processing Number of customer purchase orders

Line-item processing Number of line items ordered by customers

Delivering to stores Number of store deliveries

Cartons shipped to store Number of cartons shipped

Stocking of customer store shelves Hours of shelf-stocking

 

The level of each activity in the three market segments and the total cost incurred for each activity in 2015 is shown below:

 

Activity-based cost data Activity level

Pharmacare 2015

 

Activity General supermarket chains Pharmacy chains Pharmacist-owned single stores Total cost of activity in 2015

Orders processed (number) 140 360 1 500 $80 000 

Line-items ordered (number) 1 960 4 320 15 000 63 840

Store deliveries made (number) 120 360 1 000 71 000

Cartons shipped to stores (number) 36 000 24 000 16 000 76 000

Shelf-stocking (hours) 360 180 100 10 240

$301 080

 

Required:

a. Compute the 2015 gross-margin percentage for each of Pharmaguard’s three market segments.

b. Compute the cost driver rates for each of the five activity areas.

c. Use the activity-based costing information to allocate the $301080 of “other operating costs” to each of the market segments. Compute the operating profit for each market segment.

d. Comment on the results. What new insights are available with the ABC information?

e. The senior management at Phramaguard plans to implement ABC in its retail operations, manufacturing operations and its medical centre operations. The staff in these divisions are not in favour of implementing ABC and the Activity-based management (ABM). They are resisting these changes. Some employees are questioning, “why does the company need to change at all”?

f. As a consultant, give your professional advice on the benefits and limitations of adopting ABC for all its all operations at Pharmaguard. 

 

Please note: 

You need to present both parts -- your computational work and advice -- in a professional business report format.


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