ABC Analysis

Topics: Management accounting, Variable cost, Activity-based costing Pages: 2 (809 words) Published: October 25, 2014
ABC Analysis for Towels More Towels and More is a small family company that is looking to expand their company. Out of the three types of stores they sell too (major retailers, specialty retailers, and gift shops), gift shops has the highest contribution margin so the CEO believes in order to have a successful expansion, they need to pursue gift shops. The marketing manager on the other hand would like to utilize the Activity Based Costing (ABC) approach to analyze the high customer distribution and costs to determine which types of companies they should pursue for expansion. In order to determine if the CEO is right in his contribution margin based assumption as well as and in an effort to allocate customer support and distribution costs, I have been hired as an consultant to prepare segment income statements that allocate based on revenues and the other on activities. Income Statements Total CompanyDepartment StoresSpecialty ShopsGift ShopsRevenues600,000 200,000 100,000 300,000 Less variable expenses Variable Production Costs180,000 100,000 20,000 60,000 Contribution Margin420,000 100,000 80,000 240,000 Less traceable fixed expenses Customer support and distribution 240,000 80,000 40,000 120,000 Production Overhead120,000 40,000 20,000 60,000 Total traceable fixed expenses360,000 120,000 60,000 180,000 Customer Segment margin60,000 (20,000)20,000 60,000 Characteristics of ABC The characteristics of companies that may benefit from an ABC allocation system are companies that have a large amount of overhead, are currently unsatisfied with their cost information system, have a wide variety of products, as well as have a wide variation in numbers of production runs and set ups, a regular change in activities over time with few corresponding ones in the accounting system and an improved computer technology (Hamzeh, 2013). TM has a rather high overhead mainly around the selling and distribution cost. After considering the overhead costs,...
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