Question

Would activity-based costing or activity-based management be useful for the airport store? Why or why not?

Answer 1

Answer with Explanation:

Activity based costing will not be useful because the airport store has hundreds of items which share a indirect costs like rentals, warehouse expenses, delivery costs, electricity, maintenance costs, etc.

The reason why its use in the case of airport store is not beneficial is as under:

1. Time Consuming: All indirect costs can't be absorbed in hundreds of product and would take more than one month to allocate indirect costs to each product.
2. List of Restricted Product Price: Another reason is that the airport stores are given a price schedule which restrict selling of products at higher costs. This means if the contribution arising from the product then we can't change its price as it is restricted by the airport authorities.
3. The indirect cost remains fixed and is not changing in this case which means it is not determinable which product consumes greater share of indirect cost as sometimes shelves will be not 100% occupied hence determining cost drivers for each cost pool would be a difficult task.
4. Purpose is Lost: The purpose of ABC is to allocate the indirect costs to each product which apportioned on a fairer basis and lower the indirect cost by lowering the usage of cost drivers. The indirect costs can't be lowered as maintenance cost is fixed, electricity consumption remains the same, rentals are also fixed, this means that the purpose of allocation and controlling of cost drivers is lost.
5. Suitable for Manufacturers not for Stores: The manufacturer's products deal with dozens of costs that are variable if the cost driver changes. The cost driver changes are not changing the indirect cost in the case of airport store which means that if a product which occupied 1 shelve is now occupying 2 shelves is not increasing the rental cost.

Hence ABC is not suitable for airport store.