This assignment has two parts:
-Part A: Technical or Practical
-Part B: Report writing (2 000 words)
Please note:
- Useful links: http://federation.edu.au/__data/assets/pdf_file/0015/164121/FedUni-General-Guide-to-Referencing-2014.pdf
- http://federation.edu.au/__data/assets/pdf_file/0018/190044/General-Guide-to-Writing-and-Study-Skills.pdf
- This is a group-assignment. Each group needs to have 2 to 3 members in it. Please organise yourselves into groups.
- Please make sure that names and ID numbers of all group members are stated on the cover sheet of your submission.
As this is a group assignment, each member of your group is awarded the same mark. Working in groups has its pros and cons. I am sure that you will hold constructive and energetic group discussions on the issues at hand. In case of any disagreements, you will be able to resolve them in a reasonable way. There will be times when you may have to agree to disagree with each other. Invariably different group members bring different skills to a project; it is up to you to make the best of it. I believe one can learn a lot by discussing the issues with one's colleagues.
If you find your group members are "not pulling their weight" or there are problems with any member's commitment, then please try to resolve those issues amongst yourselves. Open and honest communication always helps. If you are unable to resolve these issues, you are most welcome to see me and we will try to sort out the problems together. Do this as soon as possible and certainly before the due date.
For some reason, if you do not wish to work in a group, please let us know.
You are a management accountant at Delots Management Consultants. You have been approached by Pharmaguard Ltd regarding implementing Activity-based Costing (ABC) in its retail operations. The company has three main market segments:
- General supermarket chains
- Pharmacy chains
- Pharmacist-owned single stores
For many years, Pharmaguard has used gross margin percentage [(Revenue-Cost of goods sold) ÷ Revenue] to evaluate the relative profitability of its market segments.
Pharmaguard's segmental profit information for 2015 is given below:
|
Pharmaguard Ltd, 2015
|
General supermarket chains
|
Pharmacy chains
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Pharmacist-owned single stores
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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
|
|
Other operating costs
|
|
|
|
301 080
|
|
Operating profit
|
|
|
|
$136 920
|
In your meetings with Pharmaguard staff, you have undertaken a value or activity analysis, where you have classified activities as value-added or non-value added. You have identified the five key activities that drive other operating costs at Pharmaguard:
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Activity area
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Cost driver
|
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Order processing
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Number of customer purchase orders
|
|
Line-item processing
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Number of line items ordered by customers
|
|
Delivering to stores
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Number of store deliveries
|
|
Cartons shipped to store
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Number of cartons shipped
|
|
Stocking of customer store shelves
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Hours of shelf-stocking
|
You have also identified:
- Each customer order consists of one or more line items. A line item represents a single product (e.g. Nurofen Plus tablets).
- Each product line item is delivered in one or more separate cartons.
- Each store delivery entails the delivery of one or more cartons of products to a customer.
- Pharmaguard's staff stacks cartons directly onto display shelves in customers' stores. Currently, there is no additional charge to the customer for shelf-stocking, and not all customers use Pharmaguard for this activity.
The level of each activity in the three market segments and the total cost incurred for each activity in 2015 is shown below:
|
Activity-based cost data
|
Activity level
|
|
Pharmacare 2015
Activity
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General supermarket chains
|
Pharmacy chains
|
Pharmacist-owned single stores
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Total cost of activity in 2015
|
|
Orders processed (number)
|
140
|
360
|
1 500
|
$80 000
|
|
Line-items ordered (number)
|
1 960
|
4 320
|
15 000
|
63 840
|
|
Store deliveries made (number)
|
120
|
360
|
1 000
|
71 000
|
|
Cartons shipped to stores (number)
|
36 000
|
24 000
|
16 000
|
76 000
|
|
Shelf-stocking (hours)
|
360
|
180
|
100
|
10 240
|
|
|
|
|
|
$301 080
|
Required:
a. Compute the 2015 gross-margin percentage for each of Pharmaguard's three market segments.
b. Compute the cost driver rates for each of the five activity areas.
c. Use the activity-based costing information to allocate the $301080 of "other operating costs" to each of the market segments. Compute the operating profit for each market segment.
d. Comment on the results. What new insights are available with the ABC information?
e. The senior management at Phramaguard plans to implement ABC in its retail operations, manufacturing operations and its medical centre operations. The staff in these divisions are not in favour of implementing ABC and the Activity-based management (ABM). They are resisting these changes. Some employees are questioning, "why does the company need to change at all"?
f. As a consultant, give your professional advice on the benefits and limitations of adopting ABC for all its all operations at Pharmaguard.