Management Accounting: Supermarket Chains

Discuss aout the Management Accounting for Supermarket Chains.

 

 

 

Pharmaguard Ltd, 2015	General supermarket chains	Pharmacy chains	Pharmacist-owned single stores	Pharmaguard Ltd
Revenues	3,708,000	3,150,000	1,980,000	8,838,000
Cost of goods sold	3,600,000	3,000,000	1,800,000	8,400,000
Gross margin	108,000	150,000	180,000	438,000
Gross Margin %	2.9%	4.8%	9.1%	5.0%

 B:

Activity-based cost data	Activity level
Pharmacare 2015	General supermarket chains	Pharmacy chains	Pharmacist-owned single stores	Total Activity Level	Total cost of activity in 2015	Cost Driver Rates
Activity
Orders processed (number)	140	360	1500	2000	$80,000	40
Line-items ordered (number)	1960	4320	15000	21280	63840	3
Store deliveries made (number)	120	360	1000	1480	71000	48
Cartons shipped to stores (number)	36000	24000	16000	76000	76000	1
Shelf-stocking (hours)	360	180	100	640	10240	16
					$301,080

The above table shows the cost drivers for different activities. This is based on total cost for each activity and total activity level for different types of stores.

The following are the rates

 

Orders processed $40  per  activity

 

Line Items  ordered $3  per  activity

 

Store Deliveries $48  per  activity

 

Cartons shipped  to  stores $1  per  activity

 

Shelf stocking   $16  per  activity

C:

Pharmaguard Ltd, 2015	General supermarket chains	Pharmacy chains	Pharmacist-owned single stores	Pharmaguard Ltd
Revenues	3,708,000	3,150,000	1,980,000	8,838,000
Cost - of - goods - sold	3,600,000	3,000,000	1,800,000	8,400,000
Gross - margin	108,000	150,000	180,000	438,000
Orders - processed - (number)	5,600	14,400	60,000	80,000
Line-items - ordered - (number)	5,880	12,960	45,000	63,840
Store - deliveries - made - (number)	5,757	17,270	47,973	71,000
Cartons - shipped - to - stores - (number)	36,000	24,000	16,000	76,000
Shelf-stocking - (hours)	5,760	2,880	1,600	10,240
Net - Margin	49,003	78,490	9,427	136,920
Net - Margin - %	1.3%	2.5%	0.5%	1.5%

Above table shows the analysis after allocating the operating cost of $301,080.

After allocation, it can be seen that pharmacist owned stores consumes lot of the operating expenses as their activity is quite high. Its gross margin has decreased from 9.1% to 0.5%. There has also been fall in margin for other divisions as now more expenses is being considered, but the fall in owned single store is maximum.

D:

Pharmacare - 2015	General - supermarket - chains	Pharmacy - chains	Pharmacist-owned - single - stores
Orders - processed - (number)	5,600	14,400	60,000
Line-items - ordered - (number)	5,880	12,960	45,000
Store - deliveries - made - (number)	5,757	17,270	47,973
Cartons - shipped - to - stores - (number)	36,000	24,000	16,000
Shelf-stocking - (hours)	5,760	2,880	1,600
Total - Operating - Cost	58,997	71,510	170,573

E:

The management should try to implement ABC costing in its retail operations, manufacturing and medical operations as this will let them understand what kind of activity consumes how much cost and this will further show the margins level more accurately.

However, the company will need to take certain precautions as ABC system doesn’t capture non-monetary benefits. The company should rate different items according to the importance of the item like from A to C.

 

 

There are lot of advantages and disadvantages of implementing ABC analysis at Pharmaguard –Some of the advantages are

 

In helps in better decision making for the company and let the management choose in which division should they continue to invest. It also helps to choose where the company can generate benefit by taking advantage of economies of scale.

 

As there are scientific measures of controlling inventories, it helps to maintain stock turnover at optimum rate.

 

It also helps in maintenance of safety stock for C category of items

Few of the disadvantages of ABC analysis are -

 

Proper system codification has to be there for successful implementation of the same.

 

This becomes relevant only if there is proper standardization of materials,

 

Only monetary value item is given importance and not any other factors.

 

Given the above analysis, the most profitable type of store is pharmacist – owned single stores which gives a gross margin of 9% and the least profitable one is the general supermarket store. If we look at the overall company level, the company is able to generate gross margin of 5%.

 

 

As far as ABC analysis is concerned, it manages the control over expensive line items. It clearly distinguishes the items which are costly and allocates cost accordingly. It is a way of controlling inventories by scientific method. It also helps in reducing clerical costs as stock is valued properly.

In the given case study, After allocation, it can be seen that pharmacist owned stores consumes lot of the operating expenses as their activity is quite high. Its gross margin has decreased from 9.1% to 0.5%. There has also been fall in margin for other divisions as now more expenses is being considered, but the fall in owned single store is maximum.

Given the above analysis, it is clearly evident that Pharmacist owned single stores are incurring maximum cost as their activities are higher. The implementation of ABC costing gives us more clear picture about what kind of store is incurring more expense.

The above analysis shows that more than 50% of the expense is incurred because of pharmacist owned stores. However, the above picture where cost are allocated equally, it was showing that these kind of pharmacist owned store are the most profitable one, which is not true.

 

The classification of the items are like –

Items A are the goods for whom the annual consumption value is the Value wise this consist of 70-80% which is around 15-20% inventory wise.

Items B are those who have a medium consumption value, like they account for 15-25% value wise and this consist of 30% of total inventory quantity

Items C are those which have the lowest consumption value wise but are around 50% of the inventory quantity

Similarly control over types of Item A should be highest as they form the major part of the cost and also better sales forecasting should be chosen. Re-ordering items of type C is made less frequently as the orders are made in bulk quantity. This also doesn’t affect the profit and loss account much as the holding costs are less.

The whole purpose of implementing ABC analysis is to find out the cost for what kind of item. This helps in correctly identifying cost and can be used for allocation of the same, which shows a true picture of the costs and hence in investment decisions the company wants to make.

By this method, allocation of cost can be done in a better way especially during cycle counts and once it is segregated by cycle counts, inventory fluctuation can be monitored.

 

 

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