Activity-based costing, activity-based management merchandising. Super Bookstore (SB) is a large city bookstore that sells books and music CDs, and has a café. SB operates at capacity and allocates selling, general and administration (S, G & A) costs to each product line using the cost of merchandise of each product line. SB wants to optimize the pricing and cost management of each product line. SB is wondering if its accounting system is providing it with the best information for making such decisions.

Super Bookstore incurs the following Selling General & Administration costs:

1. Suppose Super bookstore uses cost of merchandise to allocate all S, G & A costs. Prepare product line and total company income statements.

2. Identify an improved method for allocating costs to the three product lines. Explain. Use the method for allocating S, G & A costs that you propose to prepare new product line and total company income statements. Compare your results to the results in requirement 1.

3. Write a memo to Super Bookstore’s management describing the state of its accounting system, any improvements that you would recommend, and how the information may be useful for product line decisions.

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Super Bookstore Product Line Information For the Year Ended December 31, 2010 Café Books CDs Revenues of Merchandise Cost of Café Cleaning Number of Purchase orders Placed Number of Deliveries Received Hours of Shelf Stocking Time Items sold $3,720,480 $2,656,727 $2,315,360 $1,722,311 S736,216 S556,685 S 18,250 2,800 1,400 15,000 2,000 1,600 10,000 368,108 2,500 1,700 14,000 115,768 124,016