Read the following case, which can be downloaded from the textbook site at www.wiley.com/college/eldenburg(IMA grants permission to copy this case for classroom use):

J. Guy and J. Saly, “Colombo Frozen Yogurt: Activity-Based Costing Applied to Marketing Costs,” Case 6 (pp. 67–69) in Cases from Management Accounting Practice, vol. 15, Wayne Bremser and Jim Mackey (eds.) (Montvale, NJ: Institute of Management Accountants, 2000.

ANALYZE INFORMATION:

The following questions will help you analyze the information for this problem. Do not turn in your answers to these questions unless your professor asks you to do so.

A. Using the ABC information in the case, prepare a new profit and loss statement for the yogurt segments.

B. The first step in setting up an ABC system is to identify relevant cost objects. In this case, the cost objects are the two yogurt product segments. Were these likely to be the only possible cost objects for Colombo’s yogurt business? Why or why not?

C. The second step in setting up an ABC system is to identify activities. In this case, the managers identified activities that were identical to the categories of costs used in the old costing system.

1. Why is the set of ABC activities usually different from the cost categories used in traditional costing systems?

2. Identify two possible reasons why Colombo’s managers decided to establish ABC activities that were identical to the old cost categories.

D. Briefly discuss whether each of the following cost pools for Colombo most likely relates to a facility-sustaining activity, customer-sustaining activity, product-sustaining activity, batch-level activity, or unit-level activity:

1. Pick/pack and shipping costs

2. Selling, general, and administrative costs

E. The fourth step in setting up an ABC system is to choose a cost driver for each ABC cost pool. Discuss whether Colombo’s ABC cost drivers for each of the following activities are reasonable:

1. Pick/pack and shipping costs

2. Selling, general, and administrative costs

REQUIRED

Suppose Colombo’s accountants are thinking about making additional changes to the ABC system. You are an intern at Colombo and have been asked to critique the existing ABC system. Turn in your answer to the following.

F. Use the information you learned from the preceding analyses to draft a memo to Colombo’s controller presenting your evaluation of whether the profit and loss statement under ABC costing from part (A) provides a reasonable measure of the profit from the two yogurt segments. Provide the controller with appropriate information for understanding your evaluation.