Chapter 5, Problem 5.43P

Activity-based costing, activity-based management, merchandising. Mountain Outfitters operates a large outdoor clothing and equipment store with three main product lines: clothing, equipment, and shoes. Mountain Outfitters operates at capacity and allocates selling, general, and administration (S, G & A) costs to each product line using the cost of merchandise of each product line. The company wants to optimize the pricing and cost management of each product line and is wondering if its accounting system is providing it with the best information for making such decisions. Store manager Aaron Budd gathers the following information regarding the three product lines:

For 2017, Mountain Outfitters budgets the following selling, general, and administration costs:

Mountain Outfitters Selling, General, and Administration (S, G & A) Costs For the Year Ended December 31, 2017
Purchasing department expense	$ 320,000
Receiving department expense	210,000
Customer support expense (cashiers and floor employees)	250,000
Rent	240,000
General store advertising	100,000
Store manager’s salary	125,000
	$1,245,000

1. 1. Suppose Mountain Outfitters uses cost of merchandise to allocate all S, G & A costs. Prepare budgeted product-line and total company income statements.

Required

1. 2. Identify an improved method for allocating costs to the three product lines. Explain. Use the method for allocating S, G & A costs that you propose to prepare new budgeted product-line and total company income statements. Compare your results to the results in requirement 1.
2. 3. Write a memo to Mountain Outfitters management describing how the improved system might be useful for managing the store.