QUESTION 3 (25 Marks)

Kemas Designs owns several home furnishings stores. In each store, consultations, if needed, are undertaken by specialists, who also visit potential customers in their homes, using specialist software to help customers realize their design objectives.

Customers visit the store to make their selections from the wide range of goods offered, after which sales staff collect payment and raise a purchase order. Customers then collect their self-assembly goods from the warehouse, using the purchase order as authority to collect. Administration staff process purchase order and also arrange consultations.

Each store operates absorption costing system. Costs other than cost of goods sold are apportioned on the basis of sales floor area.

Results for one of Kemass stores for the last three months are as follows:

Department	Kitchen	Bedroom	Dining Room	Total
	RM	RM	RM	RM
Sales	210,000	112,500	440,000	762,500
Cost of goods sold	63,000	37,500	176,000	276,500
Other Costs	130,250	81,406	113,968	325,624
Profit	16,750	(6,406)	150,032	160,376

The management accountants of Kemas are concerned that the bedroom department of the store has been showing a loss for some time, and is considering a proposal to close the bedroom department in order to concentrate on the more profitable kitchen and dining room departments. He has found that other costs for this store for the last three months are as follow:

	RM	Employees
Sales staff wages	64,800	12
Consultation staff wages	24,960	4
Warehouse staff wages	30,240	6
Administration staff wages	30,624	4
General overheads (electricity, rents, etc.)	175,000
	325,624

He has also collected the following information for the last three months:

Department	Kitchen	Bedroom	Dining Room
Number of items sold	1,000	1,500	4,000
Purchase orders	1,000	900	2,500
Floor area (square metres)	16,000	10,000	14,000
Number of consultations	798	200	250

The management accountant believes that he can use this information to review the stores performance in the last three months from an activity-based costing (ABC) perspective.

Required:

a)Produce a profit statement using activity-based costing from the information provided.

(13 marks)

b) Evaluate and discuss the proposal to close the bedroom department.

(6 marks)

c) Discuss the advantages and disadvantages that may arise for Kemas from introducing activity-based costing in its store.

(6 marks)