Question

Activity-Based Customer Costing

Sleepeze Company produces mattresses for 20 retail outlets. Of the 20 retail outlets, 19 are small, separately owned furniture stores and one is a retail chain. The retail chain buys 60% of the mattresses produced. The 19 smaller customers purchase mattresses in approximately equal quantities, where the orders are about the same size. Data concerning Sleepeze’s customer activity are as follows:

	Large Retailer		Smaller Retailers
Units purchased	108,000		72,000
Orders placed	36		3,600
Number of sales calls	18		882
Manufacturing costs	$43,200,000		$28,800,000
Order filling costs allocated*	$1,745,280		$1,163,520
Sales force costs allocated*	$810,000		$540,000
*Currently allocated on sales volume (units sold).

Currently, customer-driven costs are assigned to customers based on units sold, a unit-level driver.

Required:

Assign costs to customers by using an ABC approach. Round your answers and all intermediate calculations to the nearest dollar.

Order filling rate	???
Selling call rate
Cost assignment:
Large retailer
Smaller retailers

Answer 1

Answer:

Order filing rate	800	per order
Selling call rate	1,500	per sales call
Cost assignment:
Large retailer	55,800
Small retailers	4,203,000

Calculation:

Here we need to assign costs to customers by using an ABC approach.

For that first we need to find the total activity by adding the orders placed and sales calls as below:

	Large Retailer	Smaller Retailers	Total Activity
Ordering	36	3,600	3,636
Sales calls	18	882	900

Then we need to find the total costs incurred fo rboth ordering and sales calls of the large and small retailers.

	Large Retailer	Smaller Retailers	Total Costs
Ordering	1,745,280	1,163,520	2,908,800
Sales calls	810,000	540,000	1,350,000

Then we need to find the activity rate. For that we need to divide the tota cost of the ordering and sales calls of the large and small retailers with the total activity.

Thus we get the Order filling rate and the Selling call rate:

	Total Costs	Total Activity	Activity Rate
Ordering	2,908,800	3,636	800
Sales calls	1,350,000	900	1,500

Then we need to find the Cost assignment:

After that we need to find the total cost assigned for the large retailer by mutiplying the acivity rate with the number of activity for the ordering and sales calls:

	Activity Rate	Activity	ABC Cost
Ordering	800	36	28,800
Sales calls	1,500	18	27,000
Total costs assigned			55,800

After that we need to find the total cost assigned for the small retailer by mutiplying the acivity rate with the number of activity for the ordering and sales calls:

	Activity Rate	Activity	ABC Cost
Ordering	800	3,600	2,880,000
Sales calls	1,500	882	1,323,000
Total costs assigned			4,203,000