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The organization is divided into a head office and its branches. The head office has a
purchasing team and a marketing team and there are four branches which divide Seoul
into Gangnam, Gangbook, Gangdong, and Gangseo. Each branch has its own manager,
sales team, and service team.
The CEO oversees the company as a whole, the purchasing team purchases water
purifiers and filters needed for rentals from the suppliers and distributes them to the
branches, and the marketing team does marketing activities for the company. The
branch sales teams search for new clients in their respective regions and the branch
service teams provide services such as installation, regular maintenance, irregular
maintenance, and removal to the clients.
The monthly rents received from the clients are the revenue for ABC Corp. The
expenses incurred at the head office and the branch sales teams are selling expenses
and general and administrative(G&A) expenses, and the expenses incurred at the
branch service teams are costs of goods sold(COGS). Water purifiers are not
depreciated until installation after which they are depreciated monthly. They are
owned by the branch service teams and the depreciation expenses are considered as
COGS.
From managerial accounting viewpoint, each branch is classified as a profit center for
which managerial gains and losses are computed monthly. From multi-dimensional
profitability analysis viewpoint, the “contract number” is defined as the minimum unit
and the profitability of each contract number is used to analyze profitability on many
dimensions such as clients, client groups, and products.
1
Activity-based costing(ABC) is applied to the purchasing team and the marketing team
for more precise expense computations. ABC is also applied to branch service teams
to manage service employee activities and the amount of work done is counted and
managed monthly.
ABC Corp. provides two types of products which are corporate products and home
products. The monthly rent is \220,000 for corporate products and \180,000 for
home products. The price was established after considering the purchasing cost of
new model water purifiers. Three-year straight-line depreciation was applied and the
rents were set to be 220% and 200% of monthly depreciation for corporate products
and home products respectively. In other words, monthly depreciation was \100,000
for corporate products and \90,000 for home products. After three years,
depreciation expenses are reduced in half due to capital expenditures related to
repairing expenses. There are no quantity discounts for clients that rent in large
quantities.
The number of service employees at each branch is determined by the current number
of contracts. As all branches have two contracts as of now, so the number of service
employees is same for all branches.
Under these policies, the revenues and expense of each department for the month are
as follows
2
Gangbuk
70,000 390,000 20,000 52,000
Service Team
Gandong
400,000 23,000
Branch
Gangdong
25,000 5,000
Sales Team
Gangdong
70,000 95,000 26,000 26,000
Service Team
Gangseo
400,000 23,000
Branch
Gangseo
25,000 5,000
Sales Team
Gangseo
70,000 190,000 30,000 20,000
Service Team
Total 2,040,000 610,000 865,000 116,000 128,000 100,000 50,000
Revenues are attributed to the main cost center of each branch while all expenses
including employee pays are attributed exactly to the cost center at which they occur.
There are no bulk executive expenses.
Depreciation expenses are related to the depreciation of water purifiers that are on
rent to the clients. Travel and transportation expenses are costs spent to make trips
to clients, and supplies expenses are costs of new filters used for regular and irregular
maintenance. Supplies expenses are managed by counting the number of filters used
by each purifier.
Moreover, based on the executive judgment that profit margins for corporate products
are 20%p higher than those for home products, all marketing expenses of the
marketing team are used for corporate product marketing. The logistics expenses of
the purchasing team are used for distributing water purifiers and filters purchased
from suppliers to each branch.
Current contracts for each branch and revenues and depreciation expenses related to
each contract are as follows
ABC Corp. has the following list of activities for each cost-computable department.
3
Logistics Regular Check‐Service
Managing Activity On Demand Check‐Travel
Marketing Team Corporate Marketing On Demand Check‐Service
House Marketing
The activities of branch service teams are defined to be measurable for each employee
and the definitions are applied equally across all branches.
ABC Corp. allocates CEO expenses to each department of the company based on the
number of employees in each department, which is shown in the following
After allocating CEO expenses, the activity costs are computed for the purchasing
team and the marketing team. All expenses including allocated CEO expenses are
divided into activity direct costs and activity indirect costs. Activity direct costs are
attributed to the activities themselves while activity indirect costs are again divided
into labor expenses and non-personnel expenses. Labor expenses are allocated based
on the cost of labor per activity and non-personnel expenses and CEO expenses are
allocated based on the number of employees per activity.
Logistics expenses incurred by the purchasing team are direct costs of logistics
activities and advertisement expenses incurred by the marketing team are direct costs
of corporate product marketing activities. Also, in order to compute activity indirect
costs, all employees report how much weight each activity occupied in their work at
the end of every month. The reports are used to calculate the number of employees
per activity which is then weighted by individual employee pay to calculate the cost
of labor per activity.
Activity weights and pays for each employee at the purchasing team and the marketing
team this month are as follows.
4
ABC Corp. allocates activity costs as shown in the following chart.
The management activities of each team are allocated to other activities of the team
and the combined costs which include management activity costs are allocated to profit
centers. However, in order to prevent them from affecting service team activity cost
computations, they are allocated only to branch level. For this month, the information
about each branch needed for cost allocation is as follows.
5
Along with being allocated to each department, corporate product marketing activity
costs and home product marketing activity costs are also used in profitability analysis
viewpoints because they are considered as direct costs for the products.
To manage service team employee activities, ABC Corp. computes labor expenses
with activity-based costing and generates information about the efficiency of detailed
activities, which is also used in multi-dimensional profitability analysis. Calculations
of costs for each branch/activity are done by computing total service team employee
pay with respect to total amount of time spent per activity. Also, corporate average
cost per activity is used when allocating activity costs to each contract. The difference
with branch activity cost is used to indicate whether the branch is efficient or
inefficient.
ABC Corp. makes all service employees who make a visit to clients enter information
about contract number, kind of service performed (installation, regular maintenance,
irregular maintenance), and, in the case of maintenance service, the amount of time
spent for travelling and performing service to their GPS-linked mobile application.
6
The following is this month’s list of the number of services performed and hours spent
by each employee in each activity for each contract.
Service Service
Branch Employee Service Contract Activity
Times Hours
C01 Regular Check‐Traveling 2 1.0
S1
C01 Regular Check‐Service Peformance 2 3.0
C01 Regular Check‐Traveling 2 1.0
S2
C01 Regular Check‐Service Peformance 2 4.0
C01 Regular Check‐Traveling 2 1.0
Gangnam S3
C01 Regular Check‐Service Peformance 2 4.0
C01 Regular Check‐Traveling 2 1.0
S4
C01 Regular Check‐Service Peformance 2 5.0
H01 Regular Check‐Traveling 2 1.0
S5
H01 Regular Check‐Service Peformance 2 4.0
C02 Installation 1 6.0
N1 C02 Regular Check‐Traveling 1 0.5
C02 Regular Check‐Service Peformance 1 6.0
C02 Regular Check‐Traveling 2 1.0
Gangbuk N2
C02 Regular Check‐Service Peformance 2 12.0
C02 Regular Check‐Traveling 2 1.0
N3
C02 Regular Check‐Service Peformance 2 12.0
N4 C02 Regular Check‐Traveling 2 1.0
7
C02 Regular Check‐Service Peformance 2 12.0
C02 Regular Check‐Traveling 1 0.5
C02 Regular Check‐Service Peformance 1 6.0
N5
H02 Regular Check‐Traveling 2 1.0
H02 Regular Check‐Service Peformance 2 4.0
C03 Regular Check‐Traveling 2 1.0
C03 Regular Check‐Service Peformance 2 4.0
E1
C03 On demand Check‐Traveling 1 0.5
C03 On demand Check‐Service 1 2.0
C03 Regular Check‐Traveling 2 1.0
C03 Regular Check‐Service Peformance 2 4.0
E2
C03 On demand Check‐Traveling 1 0.5
C03 On demand Check‐Service 1 2.0
Gangdong C03 Regular Check‐Traveling 2 1.0
E3 C03 Regular Check‐Service Peformance 2 4.0
H03 Installation 1 4.0
C03 Regular Check‐Traveling 2 1.0
E4
C03 Regular Check‐Service Peformance 2 4.0
H03 Regular Check‐Traveling 2 1.0
H03 Regular Check‐Service Peformance 2 4.0
E5
H03 On demand Check‐Traveling 1 0.5
H03 On demand Check‐Service 1 3.0
C04 Regular Check‐Traveling 2 2.0
W1
C04 Regular Check‐Service Peformance 2 4.0
C04 Regular Check‐Traveling 2 2.0
W2
C04 Regular Check‐Service Peformance 2 4.0
C04 Regular Check‐Traveling 2 2.0
Gangseo W3
C04 Regular Check‐Service Peformance 2 4.0
C04 Regular Check‐Traveling 2 2.0
W4
C04 Regular Check‐Service Peformance 2 4.0
H04 Regular Check‐Traveling 2 2.0
W5
H04 Regular Check‐Service Peformance 2 4.0
For multi-dimensional profitability analysis, ABC Corp. allocates the costs of indirect
departments and branches that do not apply activity-based costing to each contract
as well based on the following criteria
8
For each contract, this month’s information needed for cost allocation is as follows
Lastly, ABC Corp. allocates all costs that require top down distribution based on
revenues.