Profit And Loss By Segment Pre Abc Colombo Soft Serve Frozen

Lprofit And Loss By Segment Pre Abccolombo Soft Serve Frozen Y Ogart

Lprofit And Loss By Segment Pre Abccolombo Soft Serve Frozen Y Ogart

Lprofit And Loss By Segment - Pre-ABC Colombo Soft-Serve Frozen Y Ogart Income Statement Category Impulse Segment Yogurt Shops Line Total

Sales in Cases 1,500,000 1,200,000

Sales Revenue $29,850,000 $23,880,000 $5,970,000

Less: Price Promotions 4,500,000 3,600,000

Net Sales (Line 1 -2) $25,350,000 $20,280,000 $5,070,000

Less: Cost of Goods Sold $17,250,000 $13,800,000 $3,450,000

Gross Margin = Net Sales - COGS (Line 3 -4) $8,100,000 $6,480,000 $1,620,000

Less: Merchandising Expenses $1,725,000 $1,380,000

Less: Selling, General & Admin Expenses $1,185,000

Net Income (Line ) $5,190,000 $4,152,000 $1,038,000

Paper For Above instruction

Introduction

The competitive landscape of the frozen yogurt market, particularly for companies such as Colombo Frozen Yogurt acquired by General Mills Inc. (GMI), has evolved significantly since the 1980s. GMI's expansion into the frozen yogurt segment aimed to leverage existing infrastructure to increase sales, yet faced complex challenges in understanding segment profitability. This paper explores the application of activity-based costing (ABC) to evaluate the profitability of different customer segments—shops versus impulse locations—and to assess the impact of marketing strategies, cost allocation methods, and operational efficiencies on financial performance. A detailed analysis of pre-ABC profit statements, ABC cost assignments, and managerial implications will be provided to illustrate how ABC enhances managerial decision-making and strategic planning within the context of Colombo's frozen yogurt business.

Background and Market Structure

Colombo Yogurt’s initial distribution through independent shops faced fierce competition from franchise operations like TCBY and Freshens, which gradually eclipsed the traditional shop segment. Subsequently, the market shifted towards foodservice operators including cafeterias, colleges, and buffets, which capitalized on soft-serve yogurt as a complementary offering rather than a primary focus. By the late 1990s, impulse locations accounted for approximately two-thirds of the soft-serve yogurt market (GMI, 1994). This shift was driven by product innovation and changing consumer preferences, requiring Colombo and GMI to reassess their operational priorities and cost structures.

The marketing approach under GMI's foodservice division included reassigning the salesforce to cover both segments, charging merchandising costs uniformly, and offering price promotions mainly targeted at impulse channels. Despite Unification of marketing strategies, cost allocations remained based on sales revenue, which obscured true profitability at the segment level, especially as promotional costs and operational efficiencies varied significantly between shops and impulse locations.

Pre-ABC Profit Analysis

The initial profit and loss statement reveals that the total net income was approximately $5.19 million; however, the allocation of costs based on sales dollar proportions failed to capture the true costs associated with serving each segment. For instance, the gross margin was higher for shops ($1.62 million) compared to impulse locations ($6.48 million), a discrepancy that appears inconsistent considering operational differences. When merchandising costs and SG&A expenses are allocated on a sales basis, it potentially distorts segment profitability, hindering strategic decisions such as resource allocation or targeted marketing.

Moreover, the cost of goods sold (COGS) included ingredients, packaging, shipping, and pick/pack costs, with notable variation dependent on order size. Full-pallet orders involved a fixed cost ($75 per pallet) whereas individual case orders cost $2.25 per case, creating variability in costs that the traditional accounting methods fail to accurately attribute to specific segments. This underscores the necessity for an activity-based costing approach to distinguish between value-added and non-value-added activities, and to assign costs more accurately.

Implementation of Activity-Based Costing

Applying ABC involves identifying activities that consume resources, assigning costs based on actual activity drivers, and segregating value-added from non-value-added processes to improve accuracy in product and segment profitability analysis (Kaplan & Cooper, 1998). In Colombo's case, activities such as receiving materials, moving products within warehouses, and expediting shipments are critical cost pools.

The detailed interview data from the receiving department illustrate the importance of activity analysis. Supplies, depreciation of equipment, overtime, and salary distributions were broken down across activities with associated costs. For example, supplies represented 60% of the total supplies budget, depreciations accounted for $6,000 mostly on forklift and PC equipment, and overtime costs were solely linked to expediting activities. Sales representatives’ time was allocated based on time percentages, with only 1% devoted to shops, suggesting that traditional cost allocations underestimated the true activity consumption in segment servicing.

In terms of activity cost drivers:

- Receiving material involves processing 500 receipts.

- Moving material entails 200 moves.

- Expediting involves 100 instances.

Cost drivers such as number of receipts, moves, and expedites serve as basis for allocating expenses more accurately, revealing the true resource consumption by each activity and segment.

Contrasting Traditional and Activity-Based Costing Methods

Traditional costing allocates indirect costs proportionally based on sales revenue, which often results in distorted profit margins—overcosting some segments and undercosting others. In contrast, ABC traces costs directly to activities and allocates these based on actual consumption, offering a finer granularity that informs managerial decisions (Horngren et al., 2000).

For example, the allocation of sales force salaries based purely on sales revenue (which increased total SG&A to $3.9 million from $1.18 million) neglects the time actually spent servicing segments. Activity analysis shows that sales reps spent minimal time on shops (1%), despite these being high-margin segments, leading to an underestimation of the true cost of servicing shops and masking their profitability status if assessed solely through traditional methods.

Furthermore, ABC provides insights into identifying non-value-added activities, such as unnecessary move or expedite costs, and facilitates process improvements, cost reductions, and strategic pricing adjustments that enhance segment-level profitability.

Implications for Strategic Decision Making

The refined costing information impacts how Colombo’s management approaches segment strategic management. Accurate identification of segment profits guides decisions regarding resource allocation, promotional spending, and service levels. For instance, segments with high activity costs relative to their revenues might be targeted for efficiency improvements or pricing strategies that better reflect their true cost structures.

Additionally, ABC supports evaluating the effectiveness of promotional programs by linking activity costs directly to respective marketing initiatives. This enables management to allocate promotional budgets to activities that drive profitable growth, rather than relying on broad-based allocations.

Lastly, ABC can also inform product innovation decisions by ascertaining the true cost of new offerings within each segment, optimizing product mix, and tailoring marketing efforts accordingly, ensuring longer-term profitability and competitive advantage.

Conclusion

The application of activity-based costing techniques to Colombo Frozen Yogurt's operations highlights critical differences from traditional cost allocation methods. ABC unveils the actual resource consumption by segment and activity, leading to more precise profitability analysis, better strategic decision-making, and operational efficiencies. As the competitive landscape continues to evolve, adopting such detailed cost management tools enables firms like Colombo to optimize their offerings, allocate resources judiciously, and sustain profitable growth in a dynamic market.

References

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