Question 1

An online retailer of home furnishings purchases furniture from different manufacturers. The furniture is shipped to the company headquarters in KL where it is stored until sold. The furniture is then shipped to the customer using the company's truck fleet.The furniture is sold online via webpages.The retailer is considering to implement Activity Based Costing (ABC). The following are the annual budgeted costs and ABC rates of various overheads:-

PurchasingRM 5,000,000 @ RM500 per Purchase Order

Shipping to KLRM3,000,000 @ RM500 per shipment

Receiving and inspection RM5,000,000 @ RM300 per inspection

Warehousing (KL)RM30,000,000 @ RM1 per RM1 value of average inventory

General advertisingRM5,000,000 @ ?

Website maintenance:

-General designRM800,000 @ ?

-Product-related RM4,000,000 @ RM500 per webpage

Order processing RM4,000,000 @ RM100 per customer order

Shipping to customersRM3,000,000 @ RM500 per shipment

AdministrationRM1,000,000 @ ?

Required:

a) Group the activities according to unit, batch, product, or facility level cost.(4 marks)

b) Furniture Item #701 cost RM200,000. To sell them online requires 30 purchase orders, 20 shipments to KL, 20 inspections, an average stockholding of RM20,000 inventory at any one time, 20 webpages, 200 customer orders, and 200 shipments to customers.Find the total cost of selling Item #701 online.(6 marks)

The activities, their costs, and the cost of best practices (competitors) for the different activities are listed as follows.

Continued ...

Activity

Activity Cost RM

Cost of Best Competitor RM

Purchasing

Shipping to KL warehouse

Receiving and inspection

Warehousing

General advertising

Website maintenance

Order processing

Shipping to customer

Administration

5,000,000

3,000,000

5,000,000

30,000,000

5,000,000

4,800,000

4,000,000

3,000,000

1,000,000

6,000,000

2,000,000

6,000,000

30,000,000

6,000,000

3,600,000

4,500,000

2,000,000

1,000,000

Required:

c) What activities are potential sources of cost savings? Explain(4 marks)

d) Suggest and explain what this online retailer should do first before implementing ABC, andhow this retailer will benefit from implementing ABC?(4 marks)

e) Discuss the following statement: "The product costs reported in audited financial statements is not the product cost estimated through ABC" .(2 marks)

[Total: 20 marks]