This is a cost allocation problem for a merchandising firm. Since merchandising firms do not have overhead, you must allocate "operating costs" instead of "overhead costs." Also, the allocations in this problem are to a department, not to a product or job. Nonetheless, the allocation process is the same. Just follow the three steps used in the lectures:

Read the problem and question carefully to determine the cost driver.

Compute the "overhead" rate - budgeted operating costs / budgeted driver.

Allocate to the specific department - overhead rate X driver for the specific department.

Remember that with activity-based costing (Part B), there is more than one driver and more than one rate, and the allocation to a department is the sum of several individual allocations.

Each part of the problem is worth five points, and you get eight tries per part. ______________________________________________________

Books and Brew (BB) is a large city bookstore that sells books and music CD's, and also has a cafe. Currently, BB uses a single-driver system to allocate its operating costs to each of its three product lines, using the the number of items sold as the single cost driver. But BB's management is concerned that this allocation system may not be providing the best information for making a variety of pricing decisions. BB's operating costs for 2014 were as follows:

Purchasing Department	$476,000
Receiving Department	$432,000
Shelf-Stocking Employee Salaries	$491,000
Cashier and Floor employee salaries	$134,000

2014 information about BB's product lines is also available:

	Books	CD's	Cafe
Revenue	$4,000,000	$2,267,000	$825,000
Cost of merchandise	$2,979,000	$1,698,000	$575,000
# of purchase orders placed	2,620	2,540	2,100
# of deliveries received	1,300	1,770	1,770
Hours of shelf stocking time	15,900	14,300	10,200
# of items sold	133,000	115,000	256,000

REQUIRED:

ROUND ALLOCATION RATES TO THREE DECIMAL PLACES AND ALLOCATIONS TO THE NEAREST DOLLAR

PART A: Using BB's single-driver system to allocate its operating costs, how much was allocated to Books in 2014?

PART B: If BB had used an activity-based costing system to allocate its operating costs in 2014, how much would have been allocated to the cafe? For cashiers and floor employee saleries, use number of items sold as the cost driver. For all other costs, the appropriate drivers should be clear.

(If you could show explanation, I'd really appreciate it)

Answer rating: 100% (QA)

PART A Allocation of operating costs to Books using single driver system in 2014 Total operating cos... View the full answer