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Subject P2: Advanced Management Accounting

1.3 It has been suggested that Activity Based Management (ABM) can be used at
both an operational and a strategic level within an organisation.

Classify the following as either operational (O) or strategic (S)
applications of ABM:

1 Using Activity Based information to improve efficiency: O/S

2 Identifying and removing non value adding activities: O/S

3 Carrying out a Customer Account Profitability exercise to better focus ales
activity: O/S

4 Using Activity Based information to design and develop new products: O/S

1.4 Wayne Co. has gathered the following information about activities it performed
for two of its main customers.
Customer A Customer B

Number of orders 5 30
Units per order 1,000 200
Sales returns: Number of returns 2 5
Total units returned 40 175

Number of sales visits 12 4

Wayne Co. sells its products at $200 per unit. The firm’s gross margin ratio is
25%. After a careful analysis, Wayne Co’s management accountant has
determined the following activity costs:

Activity Cost Driver and Rate

Order processing: $300 per order

Sales calls: $1,000 per visit

Deliveries $500 per order returned

Sales returns $100 per return and $5 per unit.

Which one of the following statement is true?

A Both customers are equally profitable to Wayne Co.

B Customer A is more profitable than Customer B.

C Customer A is less profitable than Customer B.

D Both customers are served at a loss for Wayne Co.

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