Question

) Hector Gonzales runs the Floral Art Company, which supplies floral arrangements to three large supermarket chains throughout Australia. Management has become concerned about the rising costs associated with the process and dispatch of orders. An activity analysis of the indirect costs identified the following customer-related costs.

		Estimated indirect costs	Total expected use of cost driver*
				Use of cost driver           Supermarket customer
Acitvity cost pool	Cost driver
				1	2	3
Orders processing	Number of orders	$200,000	450	300	100	50
Returns processing	Number of returns	$50,000	100	50	25	25
Delivery	Number of deliveries	$100,000	700	400	200	100
Rush orders	Number of rush orders	$70,000	50	10	20	20
Sales visits	Number of visits	$20,000	100	50	25	25

Required:

1. Assign the activity costs to each of the three customers

Answer 1

Solution

	Total Activity cost
Customer 1	$       239,476
Customer 2	$         92,802
Customer 3	$         82,008

Working

Calculation of Activity rates
Activity Cost Pool	Activity driver	Overhead Cost (A)	Expected Activity (B)	Activity rate (A/B)
Order processing	Number of order	$ 200,000	450	$          444.44	Per order
Returns processing	Number of return	$ 50,000	100	$          500.00	Per return
Delivery	Number of deliveries	$ 100,000	700	$          142.86	Per deliveries
Rush order	Number of rush order	$ 70,000	50	$       1,400.00	Per rush order
Sales visit	Number of visit	$ 20,000	100	$          200.00	Per visit

.

Cost assigned to Customer 1
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Order processing	$                               444.44	300.00	$ 133333.33
Returns processing	$                               500.00	50.00	$ 25,000
Delivery	$                               142.86	400.00	$ 57,143
Rush order	$                           1,400.00	10.00	$ 14,000.00
Sales visit	$                               200.00	50.00	$ 10,000.00
Total Overheads assigned	$ 239,476

.

Cost assigned to Customer 2
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Order processing	$                               444.44	100	$ 44,444
Returns processing	$                               500.00	25	$ 12,500
Delivery	$                               142.86	20	$ 2,857
Rush order	$                           1,400.00	20	$ 28,000
Sales visit	$                               200.00	25	$ 5,000
Total Overheads assigned	$ 92,802

.

Cost assigned to Customer 3
	Activity rate(A)	Activity Driver Incurred (B)	Overhead Assigned (C=A*B)
Order processing	$             444.44	50	$             22,222.22
Returns processing	$             500.00	25	$             12,500.00
Delivery	$             142.86	100	$             14,285.71
Rush order	$         1,400.00	20	$             28,000.00
Sales visit	$             200.00	25	$               5,000.00
Total Overheads	$             82,007.94