Question

The Chapeau Company is noted for an exceptionally impressive line of one-size fits-all men's hats. Chapeau has established the following selling and distribution support activity-cost pools and their corresponding activity drivers for the year 2018:

Activity Cost Cost driver

Marketing $160,000 $1,450,000 of sales

Customer service 70,000 10,000 customer

Order execution 5,000 200 orders

Warehousing 15,000 125 product lines

Required:

a. Determine the activity-cost-driver rate for each of the four selling and distribution activities.

b. Under what circumstances is it appropriate to use each of the activity-cost drivers?

c. Describe at least one possible negative behavioral consequence for each of the four activity-cost drivers.

Answer 1

a]	Activity	Cost	Cost driver	Activity cost driver rate
	Marketing	$    1,60,000	$    14,50,000	11.03%	of sales
	Customer service	$        70,000	10000	$                     7.00	per customer
	Order execution	$          5,000	200	$                   25.00	per order
	Warehousing	$        15,000	125	$                 120.00	per product line
b]	Marketing:
	If the marketing costs can be expected to vary with sales dollar volume.
	Customer service:
	If the services rendered are the same for all customers.
	Order execution:
	If the order execution process is the same for all orders and the resources are
	consumed almost equally for each order, irrespective of its value or volume.
	Warehousing:
	If the space occupied by all the product lines is the same.
c]	% of sales dollars:
	Product-line wise marketing cost analysis will not be undertaken.
	Per customer:
	Value for the services rendered to the customers will not be
	distinguished.
	Per order:
	Valuable orders will not get priority.
	Per product line:
	Warehousing space will not be economised.