Task 2: Understanding Overheads Cinto Ltd, a distributor of special pharmaceutical products, operates at capacity and has three main market segments: a) General supermarket chains b) Pharmacy chains c) Pharmacist-owned single-store pharmacies. John Best, the new management accountant of Cinto, reported the following data for 2014: For many years, Cinto has used gross margin percentage ((Revenue – Cost of goods sold) ÷ Revenue) to evaluate the relative profitability of its market segments. But John recently attended a seminar on activity-based costing and is considering using it at Cinto to analyse and allocate ‘other operating costs’. He meets with all the key managers and several of his operations and sales staff and they agree that there are five key activities that drive other operating costs at Cinto: 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. Cinto’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 Cinto for this activity. The level of each activity in the three market segments and the total cost incurred for each activity in 2014 is shown below: Required 1. a) Calculate the 2014 gross-margin percentage for each of Cinto’s three market segments. 2. b) Calculate the cost driver rates for each of the five activity areas. 3. c) Use the activity-based costing information to allocate the $301 080 of ‘other operating costs’ to each of the market segments. Calculate the operating profit for each market segment as a dollar number and a percentage of revenues. 4. d) Comment on the results. What new insights are available with the activity- based costing information?
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