HiClass Furniture LTD

i) Calculate using the ABC technique and prepare a revised profit statement for each of the three departments justifying your choice of cost driver.

Design staff salaries £99,000
Sale Staff salaries £259,200
Warehouse Staff wages £120,960
Administration Staff wages £122,946
General Overheads £700,000 £1302,496

Activity | Cost Driver | Design Staff salaries | No. of Consultations with design staff | Sale Staff salaries | No. of items sold | Warehouse Staff wages | No. of items sold | Administration Staff salaries | Purchase orders | General Overheads | Floor area |

Design staff salaries = £99,000 = 62.4 1,600

Sale Staff salaries = £259,200 = 47.13 5,500

Warehouse Staff wages = £120,960 = 22 5,500

Administration Staff wages = £122,946 = 14.24 8,600
General Overheads = £700,000 = 14 50,000

| Living Room | Kitchen | Bedroom | Total (£) | Design Staff Salaries =62.4 x no. of consultations with design staff | 6240 | 31,200 | 62,400 | 99,840 | Sale Staff Salaries =47.13 x no. of items sold | 47,130 | 23,565 | 188,520 | 259,215 | Warehouse Staff Wages =22 x no. of items sold | 22,000 | 11,000 | 88,000 | 121,000 | Administration staff =14.24 x Purchase orders | 1424 | 7,120 | 113,920 | 122,464 | General Overheads =14 x Floor area | 70,000 | 280,000 | 350,000 | 700,000 | Total Production Overhead (£) | 146,794 | 352,885 | 802,840 | 1,302,519 |

ii) Discuss the additional information that you would need to enable a more accurate ABC net profit for each department to be calculated. In order to gain a more accurate ABC net profit for each department, it has to be taken into consideration that activities can be based on other cost drivers to. For example, we can see that sales staff salaries are based on the number of items sold. In order to gain a more accurate result, other cost drivers have to be taken into consideration as sales staff are not always involved in selling products, but engage in sales calls, quoting, sales meetings and presentations.
Activity based costing recognizes that individual overhead components can be distributed differently for different products. One product may consume relatively more maintenance resources, for instance, while another product may consume relatively less maintenance resources but relatively more machine set up resources.
When estimating sales take into account seasonal variations such as Christmas, bad weather and holiday periods etc You should analyse your sales by product groups as they may have different markets and therefore different sales patterns. Sales usually will build up slowly. Be realistic rather than optimistic.

http://www.mrdashboard.com/Activity-Based-Costing.html
http://www.solutionmatrix.com/activity-based-costing.html