Question

Books and Brew (BB) is a large city bookstore that sells books and music CDs, and also has a cafe. Currently, BB uses a single-driver system to allocate its operating costs to each of its three product lines, using the number of items sold as the single cost driver. But BB's management is concerned that this allocation system may not be providing the best information for making a variety of pricing decisions. BB's operating costs for 2019 were as follows:

Purchasing department	$500,000
Receiving department	$449,000
Shelf-stocking employee salaries	$483,000
Cashiers and floor employee salaries	$147,000

2019 information about BB's product lines is also available:

	Books	CDs	Cafe
Revenue	$3,921,000	$2,390,000	$787,000
Cost of merchandise	$2,690,000	$1,681,000	$575,000
Number of purchase orders placed	2,660	2,570	2,000
Number of deliveries received	1,480	1,500	1,490
Hours of shelf stocking time	15,200	14,100	10,300
Number of items sold	112,000	107,000	272,000

REQUIRED [ROUND ALLOCATION RATES TO THE NEAREST CENT AND ALLOCATIONS TO THE NEAREST DOLLAR.]

Part A [6 tries; 5 points]
Using BB's single-driver system to allocate its operating costs, how much was allocated to CDs in 2019?

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Part B [6 tries; 5 points]
If BB had used an activity-based costing system to allocate its operating costs in 2019, how much would have been allocated to Books? For cashiers and floor employee salaries, use number of items sold as the cost driver; for the other three cost categories, it should be clear what the appropriate drivers are.

Answer 1

Part-A	Total Operating Cost	$ 1,579,000	=500000+449000+483000+147000
	Total Number of units sold	491,000	=112000+107000+272000
	Allocation rate	$ 3.22	=1579000/491000
	Operating costs allocated to CDs in 2019	$ 344,540	=107000*3.22

Part-B		A	B	A/B
		Cost $	Total Driver Base	Allocation rate	Allocation Base
	Purchasing department	500,000	7,230	69.16	Per number of purchase order placed
	Receiving department	449,000	4,470	100.45	Per number of deliveries received
	Shelf-stocking employee salaries	483,000	39,600	12.20	Per hour of shelf stocking time
	Cashiers and floor employee salaries	147,000	491,000	0.30	Per number of item sold
		Amount $
	Purchasing department	177,741	=2570*69.16
	Receiving department	150,675	=1500*100.45
	Shelf-stocking employee salaries	172,020	=14100*12.2
	Cashiers and floor employee salaries	32,100	=107000*0.3
	Operating costs allocated to books	532,536

Working:
	A	B	A/B
	Cost $	Driver Base	Allocation rate	Allocation Base
Purchasing department	500,000	=2660+2570+2000	69.16	Per number of purchase order placed
Receiving department	449,000	=1480+1500+1490	100.45	Per number of deliveries received
Shelf-stocking employee salaries	483,000	=15200+14100+10300	12.20	Per hour of shelf stocking time
Cashiers and floor employee salaries	147,000	=112000+107000+272000	0.30	Per number of item sold