Question

OFC Company of Kansas City prints business forms and other specialty paper products, such as writing paper, envelopes, note cards, and greeting cards. Its Business Services division offers inventory management services and desktop delivery on request. The division uses an activity-based costing (ABC) system. The budgeted usage of each activity cost driver and cost-driver rates for January 2019 for the Business Services division are: Activity Cost Driver Budgeted Activity Cost-Driver Rate Storage Cartons in inventory 430,000 $ 0.5120 /carton/month Requisition handling Requisitions 36,000 27.50 Pick packing Lines 815,000 1.52 Data entry Lines 815,000 0.97 Requisitions 33,000 1.34 Desktop delivery Per delivery 13,500 33.00 For the month, the division expects to make 10,200 deliveries to deliver 1,020,000 cartons to customers. OFC Company has decided to implement a kaizen (continuous-improvement) program to enhance operational efficiency. After a careful study, management and employees agree that the firm will be able to reduce cost rates for batch-level activities by 2% and unit-level activities (other than Storage) by 1% per month during the first year of the program starting February 2019. The firm has decided to delay the implementation of the program for customer-sustaining and facility-level activities until 2020. The firm expects the amount of cost-driver usage in each of the next two months to be the same as those in January. Required:

1. Identify unit-level and batch-level activities.

2. What are the total budgeted costs for each activity and for the division as a whole in February and March?

Answer 1

Required 1.

Storage	Unit level
Pick packing	unit leve
Data entry- Lines	Unit level
Requisition handling	Batch level
Data entry- Requisition	Batch level
Desktop delivery	Batch level

Required 2.

Activity	Cost reduction rate per month	January	February	March
Storage	-	0.5120	0.5120	0.5120
Requisition- Handling	2%	27.50	26.95	26.4110
Pick packing	1%	1.52	1.5048	1.4898
Data entry- Line	1%	0.97	0.9603	0.9507
Data entry- Requisition	2%	1.34	1.3132	1.2869
Desktop delivery	2%	$33.00	$32.34	$31.6932

Budget costs

Activity	Activity volume	February	March
Storage	430,000	220,160	220,160
Requisition handling	36,000	970,200	950,796
Pick packing	815,000	1,226,412	1,214,187
Data entry-line	815,000	782,645	774,821
Data entry- requisition	33,000	43,336	42,468
Desktop delivery	13,500	436,590	427,858
Divisional total		$3,679,343	$3,630,290