Cost Allocation

Books and Brew (BB) is a large city bookstore that sells books and music CD’s, 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 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 2012 were as follows:

Purchasing department

$493,000

Receiving department

  $449,000

Shelf-stocking employee salaries

  $493,000

Cashiers and floor employee salaries

  $147,000

2012 information about BB’s product lines is also available:

Books

CD’s

Cafe

Revenue

$3,699,000

$2,218,000

$834,000

Cost of merchandise

$2,594,000

$1,653,000

$555,000

Number of purchase orders placed

2,730

2,540

2,000

Number of deliveries received

1,580

1,760

1,790

Hours of shelf stocking time

14,400

14,600

10,800

Number of items sold

114,000

114,000

362,000

1. Using BB’s single-driver system to allocate its operating costs, how much was allocated to the cafe in 2012?

2. If BB had used an activity-based costing system to allocate its operating costs in 2012, how much would have been allocated to CD’s? For cashiers and employee salaries, use number of items sold as the cost driver. For all other costs, the appropriate drivers should be clear.