Offices-On-The-Go rents temporary office space to business travellers; provides copying and fax services; and sells small amounts of office supplies, such as paper, pens and notebooks. It maintains 6 facilities in the Greater Toronto Area, all of which report to a single corporate office. You have been hired by Priscilla Solara, the manager of Store #2, to analyze costs and make recommendations regarding quality improvements. You decide to analyze Store #2's activities and develop an activity-based costing and an activity-based management system to achieve those objectives. After reviewing documents, interviewing employees, and observing daily operations, you have compiled the following list of activities:
* Purchase office supplies. Two purchasing agents process approximately 50 purchase orders per month from 5 vendors. Their salaries total $5,000 each month. Each purchasing agent uses a computer and other office equipment, and monthly amortization charges total $300. The purchasing operation occupies 1,200 square metres of the store's 8,500 square metres facility. Monthly purchases average $2,000, and about 60% of the supplies purchased are sold to customers. The remaining 40% are used in the store's operations.
* Provide office space to customers. The store's main source of revenue is renting office cubicles to customers. Each cubicle is 200 square metres and contains a desk, chair, filing cabinet, computer with Internet access, printer, and telephone. Each Offices-on-the-Go site maintains 15 such cubicles, and the monthly amortization on cubicle furniture and equipment totals $500.
* Copy and fax documents for customers. The copy and fax centre contains 5 self-service copiers and 3 fax machines. Monthly amortization on those items totals $250. The copy and fax centre occupies 1,500 square metres.
* Maintain company operations. Store #2 employs one bookkeeper at a salary of $3,000 per month and one human resource manager at a salary of $2,800 per month. Their offices contain the same equipment as the purchasing agents with the same amortization charges; both the bookkeeper and the human resource manager occupy 500 square metres offices.
* Sell office supplies to customers. Office supply displays occupy 1,000 square metres. The display racks were replaced at a cost of $1,500 last month and were expensed at that time.
* Ring up sales and collect payments. Priscilla employs 10 part-time customer service representatives. Each representative works between 25 and 30 hours per month at $12 per hour. The customer service counter and related equipment (such as cash registers)occupy the remaining 500 square metres.
In addition to costs for the above activities, Store #2 incurs the following costs every month: rent, $1500; utilities, $600; and maintenance, $800. Each month, 25% of profits are sent to the corporate office to help cover corporate expenses.
a)Store #2 currently uses a traditional costing system, allocating indirect costs to its three product lines (office space rental, copy and fax services, and office supplies sales)based on direct labour hours. Analyze the strengths and weaknesses of the current system from the perspective of the store manager. Explain why an activity-based costing system will or will not provide better information for making decisions.
b)Store #2 currently uses a traditional costing system, allocating indirect costs to its three product lines (office space rental, copy and fax services, and office supplies sales)based on the number of customers in each area. If an individual customer purchases goods or services from more than one area, they are counted with the area in which they provide the most revenue. Explain how the current system is both similar to and different from an activity-based costing system.
c)Activities in an ABC system often are classified as one of six types: organization-sustaining, facility-sustaining, customer-sustaining, product-sustaining, batch-level, or unit-level. Using the list above and your own creativity, suggest one example of each activity type for Offices-on-the-Go. Your organization-sustaining activity should focus on the corporate office; all the others should focus on Store #2.
d)List and discuss the steps you would use to assign costs in Store #2's ABC system.
e)One of the steps in designing an ABC system is assigning costs to ABC cost pools. Another step is selecting a cost driver for each pool. Based on the preceding narrative, suggest two cost pools for Priscilla's store. For each cost pool, suggest two potential cost drivers. Explain your choices of cost pools and cost drivers.
f)As you are completing the project for Priscilla, her bookkeeper shows some resistance to the ABC system. He comments: "We've always done just fine allocating costs using direct labour hours. Now you're complicating matters by talking about cost pools, cost drivers, and allocation bases. I don't understand why we can't just continue doing things the old way!" Explain the similarities and differences between cost drivers and allocation bases, and respond to the bookkeeper's concerns.
g)You have completed the first part of your task, designing the ABC system. Priscilla also wants you to begin working with her on an activity-based management system for Store #2. In your own words, define activity-based management. If you and Priscilla work together to improve operations using the ABC information, explain why it is impossible to be certain that Store #2 will achieve any benefits.

Describe Activity Based Management

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