ABC plc, a group operating retail stores, is compiling its budget statements for the next year. In this exercise revenues and costs at each store A, B and C are predicted. Additionally, all central costs of warehousing and a head office are allocated across the three stores in order to arrive at a total cost and net profit of each store operation.
In earlier years the central costs were allocated in total based on the total sales value of each store. But as a result of dissatisfaction expressed by some store managers alternative methods are to be evaluated.
The predicted results before any re-allocation of central costs are
as follows:

The central costs which are to be allocated are:
(£000)
Warehouse costs:
Depreciation ....................................................... 100
Storage ............................................................. 80
Operating and dispatch .......................................... 120
Delivery ............................................................ 300
Head office:
Salaries ..............................................................200
Advertising .........................................................80
Establishment ................................................... 120
Total ...............................................................1000
The management accountant has carried out discussions with staff at all locations in order to identify more suitable 'cost drivers' of some of the central costs. So far the following has been
revealed.

1. An analysis of senior management time revealed that 10 per cent of their time was devoted to warehouse issues with the remainder shared equally between the three stores.
2. It was agreed that the only basis on which to allocate the advertising costs was sales revenue.
3. Establishment costs were mainly occupancy costs of senior management.
This analysis has been carried out against a background of developments in the company, for example, automated warehousing and greater integration with suppliers.
Required:
(a) As the management accountant prepare a report for the management of the group which:
(i) Computes the budgeted net profit of each store based on the sales value allocation base originally adopted and explains 'cost driver', 'volume' and 'complexity' issues in relation to cost allocation commenting on the possible implications of the dissatisfaction expressed.
(ii) Computes the budgeted net profit of each store using the additional information provided, discusses the extent to which an improvement has been achieved in the information on the costs and profitability of running the stores and comments on the results.
(b) Explain briefly how regression analysis and coefficient of determination (r2) could be used in confirming the delivery mileage allocation method used in (a) above.

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(£000) (£000) (000) Sales Costs of sales Gross margin Local operating expenses 5000 2800 2200 3000 1900 1100 4000 2300 1700 310 Variable Fixed 660 700 840 730 600 370 Operating profit 290 450 Number of despatches Total delivery distances 550 520 (thousand miles) Storage space occupied (%) 70 40 50 30 90 30