Supermercados Morelos Store, USA
ABC Based Costing
In partial fulfillment of MANAC-2 taught by
Prof Raveesh.
By:
Group 2
Aarushi Anurag Saxena (MBA/2001/09)
Abhishek Kumar (MBA/2002/09)
Alisha Anand (MBA/2008/09)
Alan Anurag (MBA/2007/09)
Vanlalmalsawmdwangagzula (MBA/2092/09)
Bharat Sharma (MBA/1219/08)
Monika (MBA/2054/09)
Akshay Bavisa (MBA/2005/09)
Christeena Sunesh (MBA/2025/09)
Sachin Kumar (MBA/1264/08)
Siddhi Datri (MBA/2086/09)
Problem Statement: To maximise the profit of Supermercados Morelos, McArthur uses various
accounting methods.
Company Background:
Grupo Morelos carries the legacy of its founders, The Ibarra Family, who immigrated to the
United States in search of better opportunities. In 2003, Grupo Morelos opened its first store in
Oklahoma City to offer products that would take Mexicans back to their homeland and
strengthen their connection with their heritage. It’s a small store that offers its customers a
limited set of products.
Financial Statistics for Supermercados Morelos, McArthur:
Soft Drinks
Fresh Produce Packaged Foods
Revenue
$317,400.00
$840,240.00
$483,960.00
COGS
$240,000.00
$600,000.00
$360,000.00
Cost of bottles returned
$4,800.00
-
-
No of purchase orders placed
144.00
336.00
144.00
No of deliveries received
120.00
876.00
264.00
Hours of shelf stocking time
216.00
2,160.00
1,080.00
50,400.00
441,600.00
122,400.00
Items Sold
Here, only 3 product lines have been considered for ease of convenience.
Supermercados Morelos had the following data for 2022:
Activity
Description of
Activity
Bottle Returns
Returning empty
bottles to the store
Orders
Placing orders for
purchases
Delivery
Delivery and receipt
of merchandise
Shelf Stocking
Stocking of
merchandise on
store shelves and
ongoing restocking
Customer Support
Assistance provided
to customers,
including checkout
and bagging
Total Support (Overhead
Costs)
Cost allocation
base
Direct tracing for
$4,800.00 soft drink line
624 purchase
$62,400.00 orders
$100,800.00
1,260 deliveries
3,456 hours of shelf
stocking time
$69,120.00
614,400 items sold
$122,880.00
$360,000.00
Here, the assumption is that the store support costs, i.e., all costs other than the cost of
goods sold, are allocated to the product lines based on the COGS of each product line.
Accounting Methods used:
1. Traditional Costing:
Traditional costing is a method used to assign costs to products based on the volume of
resources they consume. It relies heavily on allocating overhead costs to products based
on a single cost driver, such as direct labor hours or machine hours. This method often
simplifies the allocation process but can result in inaccurate product costing, especially
in modern manufacturing environments where overhead costs are driven by multiple
factors beyond just labor or machine usage.
Total store support (overhead costs) =
●
●
●
●
●
Cost of bottles returned=
Cost of purchase orders=
Cost of deliveries=
Cost of shelf stocking=
Cost of customer support=
$360,000
$4,800
$62,400
$100,800
$69,120
$ 122,800
Cost of goods sold=
● Cost of soft drinks=
● Cost of fresh produce=
● Cost of packaged foods=
$ 1,200,000
$240,000
$600,000
$360,000
Allocation rate for support (overhead costs)= $360,000/$1,200,000= 30%.
Supermercados Morelos Traditional Costing Approach:
Soft Drinks
Fresh Produce
Packaged Foods
Revenues
$317,400.00
$840,240.00
$483,960.00
COGS
$240,000.00
$600,000.00
$360,000.00
$72,000.00
$180,000.00
$108,000.00
$312,000.00
$780,000.00
$468,000.00
$5,400.00
$60,240.00
$15,960.00
1.70%
7.17%
3.30%
Total support (overhead) costs- 30% of
COGS
Total Costs
Operating Profits
Profit Margin (Operating
profit/revenue)
The highest profit margin is obtained from fresh produce.
Common activities conducted to produce cost objects:
Activity
Cost Hierarchy
2
Ordering
Batch level
Delivery
Batch level
Shelf Stocking
Output unit
level
Customer Support
Output unit
level
Cost driver quantity Cost driver rate
4
5= 3-4
Total costs 3
624 purchase
$62,400.00 orders
$100,800.00
$100 per
purchase order
1,260 deliveries
3,456 hours of
$69,520.00 shelf stocking time
$122,880.00
614,400 items sold
$80 per
delivery
$20 per shelf
stocking hour
$0.20 per item
sold
2. ABC Costing:
Activity-Based Costing (ABC) is a methodology used by businesses to allocate costs
more accurately. Instead of lumping costs into broad categories, ABC identifies specific
activities that incur costs and links these costs to the products, services, or customers
that directly use those activities.
Supermercados Morelos ABC Cost based Approach:
Soft Drinks
Packaged
foods
Fresh Produce
Revenues
$317,400.00
$480,240.00
$483,960.00
COGS
$240,000.00
$600,000.00
$360,000.00
Cost of bottles returned
$4,800.00
$0.00
$0.00
Ordering Costs (144, 136, 144) purchase orders
x $100
14,400.00
33,600.00
14,400.00
Delivery Costs (120, 876, 264) deliveries x $80
9,600.00
70,080.00
21,120.00
Shelf stocking costs (216, 2160, 1080)
shelf-stocking hours x $20
4,320.00
43,200.00
21,600.00
10,080.00
88,320.00
22,480.00
$283,200.00
$835,200.00
$441,600.00
$34,200.00
$5,040.00
$42,360.00
10.78%
0.60%
8.75%
Customer support costs (50400, 441600,
122400) items sold x $0.20
Total Costs
Operating profits
Profit margin (Operating profits/Revenue)
Profitability for Supermercados Morelos under Traditional and ABC Costing Approach:
Traditional- Profit
margin
ABC- profit
margin
Traditional- operating
profit
ABC- operating
profit
Fresh Produce
7.17%
0.60%
$5,400.00
$34,200.00
Packaged food
3.30%
8.75%
$60,240.00
$5,040.00
Soft drinks
1.70%
10.78%
$15,960.00
$42,360.00
$81,600.00
$81,600.00
Total
Conclusions from the ABC Approach:
1. Soft drinks provide the highest profit margin and make the most operating profits.
2. Packaged foods provided the second-highest profit margin—lowest operating profits.
Explore whether the packaged food market share is expandable.