Question

[The following information applies to the questions displayed below.] 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 400,000 $ 0.4925 /carton/month Requisition handling Requisitions 30,000 12.50 Pick packing Lines 800,000 1.50 Data entry Lines 800,000 0.80 Requisitions 30,000 1.20 Desktop delivery Per delivery 12,000 30.00 For the month, the division expects to make 11,700 deliveries to deliver 1,170,000 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

Step 1

Requirement 1

Storage	Batch Level
Pick packing	Unit-Level
Data entry—Lines	Unit-Level
Requisition handling	Batch Level
Data entry—Requisitions	Batch Level
Desktop delivery	Batch Level

Step 2:

Requirement 2

Activity	Cost reduction rate per month	January	February	March
Storage	2%	0.4925	0.4827	0.4730
Requisition- Handling	2%	12.5	12.25	12.005
Pick packing	1%	1.5	1.485	1.47015
Data entry- Line	1%	0.8	0.792	0.7841
Data entry- Requisition	2%	1.2	1.176	1.15248
Desktop delivery	2%	30	29.4	28.812

Step 3:

Budget costs

Activity	Activity volume	February	March
Storage	400000	193080	189200
Requisition handling	30000	367500	360150
Pick packing	800000	1188000	1176120
Data entry-line	800000	633600	627280
Data entry- requisition	30000	35280	34574
Desktop delivery	12000	352800	345744
Divisional total		$2770260	$2733068