Activity Based Costing 13

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Running head: ACTIVITY BASED COSTING CASE

Activity Based Costing Case
David Welch
University of Phoenix
Accounting Capstone
ACC/594
Tom Myers
February 1, 2010

The selection of the right cost calculation method is of critical importance when it comes to determining the real product profitability. Activity Based Costing is one approach that can be used. Activity based costing is a managerial accounting system that determines the cost of activities without distortion and provides management with relevant and timely information (Dunn, 2009). This paper will briefly summarize Colombo’s competitive environment and General Mills strategy in response to that environment, using the ABC analysis, Team A will determine new segment profitability statement, and based upon the analysis, suggest changes for General Mills. Colombo’s Competitive Environment and General Mills Response Strategy

A competitive environment includes anything that affects the way a company competes with other competitors offering similar products. Examples of factors that influence the competitive environment of companies are product pricing, sales locations, marketing targets, and product enhancements or changes. For instance, a large part of Colombo’s competitive environment was marketing targets and locations. The market for frozen yogurt has changed continuously over the years. The change thus far has streamed from independent shop owners to franchises and then to food service operators, or impulse locations, and Colombo failed to monitor and adjust to the changes. Colombo continued to put their main focus on independent shop owners, and this decision hurt them when franchises started to take controller of the market. Many of their customers opted to go the franchise route and fill their purchasing needs through the franchiser. Another challenge for Colombo Frozen Yogurt was the small family-owned type of shops. These particular sales locations focused on their sales environment and the quality of their product. They lacked knowledge regarding new equipment that could be used to increase sales of yogurt while maintaining quality and Colombo Frozen Yogurt did not seize this opportunity.

General Mills’, as opposed to Colombo Frozen Yogurt, targeted multiple locations from independent shops as well as impulse locations. By expanding their target locations, as opposed to specifically targeting one group, they were able to obtain more customers and increase their sales. Another part of their response strategy when they acquired Colombo was expanding their product lines. Adding Colombo yogurt to their list of offered products was the first step in this plan. After the acquisition, General Mills’ salespeople targeted impulse locations and spent time bringing them up-to-date with the new equipment and its capabilities. This allowed them to spend additional time with their customers and gain their loyalty. Another part of General Mills response strategy was their decision to stop charging customers for merchandising promotions because it was in their practice not to charge for these services. Last, General Mills offered their Colombo customers pricing promotions to draw in their business by saving them money. Profit and Loss by segments using the ABC approach

GMI has analyzed its operations and has determined that some activities act as cost drivers in the incurrence of cost of goods sold, merchandizing, and in the selling, general, and administrative expenses (SG&A). Data relating to these activities are demonstrated in the following exhibits. Exhibit 1

Case: Colombo Frozen Yogurt
Question: Using the ABC analysis, determine new segment profitability statements ABC Analysis of Cost of Goods Sold:
Actual Use
TotalCost Drivers per Product
Activity Cost PoolsCost DriversCost of Cost DriversImpulse Yogurt Goods SoldPer ActivitySegment Shops
Ingredient, Packaging and StorageCases 14,250,000.00...
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