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Management Accounting: Supermarket Chains

  0 Downloads   |   6 Pages 1,427 Words   |   Published Date: 30/08/2017

Question:

Discuss aout the Management Accounting for Supermarket Chains.
 
 

Answer:

A:
 

Pharmaguard Ltd, 2015

General supermarket chains

Pharmacy chains

Pharmacist-owned single stores

Pharmaguard Ltd

Revenues

3,708,000

3,150,000

1,980,000

8,838,000

Cost of goods sold

3,600,000

3,000,000

1,800,000

8,400,000

Gross margin

108,000

150,000

180,000

438,000

Gross Margin %

2.9%

4.8%

9.1%

5.0%

 B:

Activity-based cost data

Activity level

 

 

Pharmacare 2015

General supermarket chains

Pharmacy chains

Pharmacist-owned single stores

Total Activity Level

Total cost of activity in 2015

Cost Driver Rates

 

Activity

Orders processed (number)

140

360

1500

2000

$80,000

40

Line-items ordered (number)

1960

4320

15000

21280

63840

3

Store deliveries made (number)

120

360

1000

1480

71000

48

Cartons shipped to stores (number)

36000

24000

16000

76000

76000

1

Shelf-stocking (hours)

360

180

100

640

10240

16

     

$301,080

 

The above table shows the cost drivers for different activities. This is based on total cost for each activity and total activity level for different types of stores.

The following are the rates
 
Orders processed $40  per  activity
 
Line Items  ordered $3  per  activity
 
Store Deliveries $48  per  activity
 
Cartons shipped  to  stores $1  per  activity
 
Shelf stocking   $16  per  activity

C:

Pharmaguard Ltd, 2015

General supermarket chains

Pharmacy chains

Pharmacist-owned single stores

Pharmaguard Ltd

Revenues

3,708,000

3,150,000

1,980,000

8,838,000

Cost - of - goods - sold

3,600,000

3,000,000

1,800,000

8,400,000

Gross - margin

108,000

150,000

180,000

438,000

Orders - processed - (number)

5,600

14,400

60,000

80,000

Line-items - ordered - (number)

5,880

12,960

45,000

63,840

Store - deliveries - made - (number)

5,757

17,270

47,973

71,000

Cartons - shipped - to - stores - (number)

36,000

24,000

16,000

76,000

Shelf-stocking - (hours)

5,760

2,880

1,600

10,240

Net - Margin

49,003

78,490

9,427

136,920

Net - Margin - %

1.3%

2.5%

0.5%

1.5%


Above table shows the analysis after allocating the operating cost of $301,080.

After allocation, it can be seen that pharmacist owned stores consumes lot of the operating expenses as their activity is quite high. Its gross margin has decreased from 9.1% to 0.5%. There has also been fall in margin for other divisions as now more expenses is being considered, but the fall in owned single store is maximum.

D:

Pharmacare - 2015

General - supermarket - chains

Pharmacy - chains

Pharmacist-owned - single - stores

 
 

Orders - processed - (number)

5,600

14,400

60,000

 

Line-items - ordered - (number)

5,880

12,960

45,000

 

Store - deliveries - made - (number)

5,757

17,270

47,973

 

Cartons - shipped - to - stores - (number)

36,000

24,000

16,000

 

Shelf-stocking - (hours)

5,760

2,880

1,600

 

Total - Operating - Cost

58,997

71,510

170,573

 

E:

The management should try to implement ABC costing in its retail operations, manufacturing and medical operations as this will let them understand what kind of activity consumes how much cost and this will further show the margins level more accurately.


However, the company will need to take certain precautions as ABC system doesn’t capture non-monetary benefits. The company should rate different items according to the importance of the item like from A to C.
 
F:
 
There are lot of advantages and disadvantages of implementing ABC analysis at Pharmaguard –Some of the advantages are
 
In helps in better decision making for the company and let the management choose in which division should they continue to invest. It also helps to choose where the company can generate benefit by taking advantage of economies of scale.
 
As there are scientific measures of controlling inventories, it helps to maintain stock turnover at optimum rate.
 
It also helps in maintenance of safety stock for C category of items

Few of the disadvantages of ABC analysis are -
 
Proper system codification has to be there for successful implementation of the same.
 
This becomes relevant only if there is proper standardization of materials,
 
Only monetary value item is given importance and not any other factors.
 
Executive Summary

Given the above analysis, the most profitable type of store is pharmacist – owned single stores which gives a gross margin of 9% and the least profitable one is the general supermarket store. If we look at the overall company level, the company is able to generate gross margin of 5%.

Introduction

 
 
As far as ABC analysis is concerned, it manages the control over expensive line items. It clearly distinguishes the items which are costly and allocates cost accordingly. It is a way of controlling inventories by scientific method. It also helps in reducing clerical costs as stock is valued properly.

In the given case study, After allocation, it can be seen that pharmacist owned stores consumes lot of the operating expenses as their activity is quite high. Its gross margin has decreased from 9.1% to 0.5%. There has also been fall in margin for other divisions as now more expenses is being considered, but the fall in owned single store is maximum.

Body

Given the above analysis, it is clearly evident that Pharmacist owned single stores are incurring maximum cost as their activities are higher. The implementation of ABC costing gives us more clear picture about what kind of store is incurring more expense.

The above analysis shows that more than 50% of the expense is incurred because of pharmacist owned stores. However, the above picture where cost are allocated equally, it was showing that these kind of pharmacist owned store are the most profitable one, which is not true.
 
classification of the items are list

The classification of the items are like –

Items A are the goods for whom the annual consumption value is the Value wise this consist of 70-80% which is around 15-20% inventory wise.

Items B are those who have a medium consumption value, like they account for 15-25% value wise and this consist of 30% of total inventory quantity

Items C are those which have the lowest consumption value wise but are around 50% of the inventory quantity

Similarly control over types of Item A should be highest as they form the major part of the cost and also better sales forecasting should be chosen. Re-ordering items of type C is made less frequently as the orders are made in bulk quantity. This also doesn’t affect the profit and loss account much as the holding costs are less.

Conclusion

The whole purpose of implementing ABC analysis is to find out the cost for what kind of item. This helps in correctly identifying cost and can be used for allocation of the same, which shows a true picture of the costs and hence in investment decisions the company wants to make.

By this method, allocation of cost can be done in a better way especially during cycle counts and once it is segregated by cycle counts, inventory fluctuation can be monitored.
 
 

References

Anna B, (1992) "Activity‐based costing", Work Study, Vol. 41 Iss: 2, pp.12-13

Helberg, J.E. Galletly, J.R. Bicheno, (1994) "Simulating Activity‐based Costing", Industrial Management & Data Systems, Vol. 94 Iss: 9, pp.3 – 8

Joon J, Brian H. K, (1997) "How to implement activity‐based costing", Logistics Information Management, Vol. 10 Iss: 2, pp.68 – 72

Amel Ben H, Bahia B, (2012) "Value management and activity based costing model in the Tunisian restaurant", International Journal of Contemporary Hospitality Management, Vol. 24 Iss: 2, pp.269 – 288

Binshan L, James C, Robert K. S, (2001) "Supply chain costing: an activity‐based perspective ",International Journal of Physical Distribution & Logistics Management, Vol. 31 Iss: 10, pp.702 – 713

Ahmed E. H , (2015) "Maintenance cost estimation: application of activity-based costing as a fair estimate method", Journal of Quality in Maintenance Engineering, Vol. 21 Iss: 3, pp.258 – 270

Jan E, (2001) "Activity‐based life‐cycle costing", Managerial Auditing Journal, Vol. 16 Iss: 1, pp.17 – 27

John C. L, (2000) "Activity‐based costing: a powerful tool for pricing", Journal of Business & Industrial Marketing, Vol. 15 Iss: 1, pp.23 – 33

Gunasekaran, H.B. Marri, Y.Y. Yusuf, (1999) "Application of activity‐based costing: some case experiences",Managerial Auditing Journal, Vol. 14 Iss: 6, pp.286 – 293

Drew S, Sanghamitra P, Erik B, Poomipak J, (2004) "Activity‐based costing for logistics and marketing", Business Process Management Journal, Vol. 10 Iss: 5, pp.584 – 597

Yuan F, S. Thomas N, (2011) "Applying activity‐based costing approach for construction logistics cost analysis", Construction Innovation, Vol. 11 Iss: 3, pp.259 – 281

Michael A. K, Steve E, (2004) "Using activity‐based costing to implement behavioural cost initiatives successfully", Journal of Facilities Management, Vol. 3 Iss: 2, pp.184 – 192

Hara K, George B, George P, (2011) "Modelling activity‐based costing in restaurants",Journal of Modelling in Management, Vol. 6 Iss: 3, pp.243 – 257

Ibrahim D, Ugur S, (2003) "Supplier selection using activity‐based costing and fuzzy present‐worth techniques", Logistics Information Management, Vol. 16 Iss: 6, pp.420 – 426

Thomas J. G, David J. C, (2000) "Using activity‐based costing to reengineer the reverse logistics channel", International Journal of Physical Distribution & Logistics Management, Vol. 30 Iss: 6, pp.500 – 514

Thomas H. S, Frank C. B, Sharon A. S, (1993) "Activity‐based Costing: An Emerging Tool for Industrial Marketing Decision Makers", Journal of Business & Industrial Marketing, Vol. 8 Iss: 2, pp.40 - 52

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