Problem 4 - Accounting

Question

From the following list of activity bases for an automobile dealership, select the base that would be most appropriate for each of these costs: (1) preparation costs (cleaning, oil, and gasoline costs) for each car received, (2) salespersons' commission of \(4 \%\) of the sales price for each car sold, and (3) administrative costs for ordering cars. a. Dollar amount of cars sold e. Dollar amount of cars ordered b. Number of cars received f. Dollar amount of cars received c. Dollar amount of cars on hand g. Number of cars ordered d. Number of cars on hand h. Number of cars sold

Step-by-Step Solution

Answer

1) b, 2) a, 3) g.

Step 1: Identify Activity Bases

Examine each potential activity base (a through h) given in the problem statement: (a) Dollar amount of cars sold, (b) Number of cars received, (c) Dollar amount of cars on hand, (d) Number of cars on hand, (e) Dollar amount of cars ordered, (f) Dollar amount of cars received, (g) Number of cars ordered, (h) Number of cars sold.

Step 2: Preparation Costs Analysis

Preparation costs involve cleaning, oil, and gasoline for each car received. These costs are best associated with the number of cars received. Hence, for preparation costs, the activity base should be (b) Number of cars received.

Step 3: Salespersons' Commission Analysis

Commissions are typically calculated as a percentage of the sales price. Therefore, salespersons' commission is best tracked using the activity base that reflects the dollar amount of the sales. Thus, for this cost, the activity base should be (a) Dollar amount of cars sold.

Step 4: Administrative Costs Analysis

Administrative costs for ordering cars are better explained by the activity base that reflects the operational aspect of this process. Therefore, the most appropriate base would be (g) Number of cars ordered, as it relates directly to the administrative process of ordering.

Key Concepts

Preparation Costs

Preparation costs comprise essential expenses involved in readying a vehicle for sale, which include cleaning, adding oil, and fueling the car. These activities are directly impacted when a new car is received by a dealership. Thus, the most logical activity base to associate with preparation costs is "the number of cars received." By using this base:

• We can accurately track the quantity and associated costs, as each new vehicle requires preparation.
• This helps in determining the total expenditure on preparation for accounting purposes.

When the number of cars received increases, preparation costs will increase proportionally, making this base a reliable indicator of incurred costs.

Sales Commissions

Sales commissions in an automobile dealership are expenses paid to salespeople as a reward for selling cars. Typically, these are calculated as a percentage of the sales price of the cars sold, thus incentivizing the sales staff to maximize sales revenue. The activity base for sales commissions is most appropriately linked to the "dollar amount of cars sold."

• This provides a direct reflection of sales performance and commission expense.
• It ensures that sales associates are motivated, as higher sales directly correlate to higher commissions.

By aligning this cost with the sales revenue, the dealership can accurately allocate resources towards its incentive structure and track performance effectively.

Administrative Costs

Administrative costs related to car ordering encompass all operational expenses necessary to bring vehicles into inventory. This includes processes like paperwork, procurement, and coordination tasks. The "number of cars ordered" serves as the most suitable activity base for these costs.

• This base is effective as it correlates directly with the administrative workload generated by ordering.
• It helps in planning and budgeting administrative resources based on ordering volume.

By leveraging this base, dealerships can monitor and manage their administrative expenses more effectively, ensuring efficient operations in vehicle procurement.

Automobile Dealership Activity Bases

Activity bases in automobile dealerships are important for identifying how costs relate to specific activities. Choosing the correct activity base is crucial for effective cost management and operational efficiency.

• Using the right base helps in tracking costs accurately, allowing the dealership to allocate resources better and control expenses.
• Activity bases can be various metrics like the number of cars received, sold, or ordered, and the dollar amount of sales or operational activities.

By understanding and implementing the correct activity bases, dealerships can better align their financial and operational strategies, ultimately contributing to improved profit margins and cost control.