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		570,000		$	0.6020	/carton/month
Requisition handling	Requisitions		64,000			12.50
Pick packing	Lines		885,000			1.68
Data entry	Lines		885,000			0.95
	Requisitions		47,000			1.22
Desktop delivery	Per delivery		20,500			37.00

For the month, the division expects to make 11,600 deliveries to deliver 1,160,000 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

1. Unit Level Activities : Desktop Delivery

Storage Cost

Batch Level Activities : Pick Packing

Data Entry

   Requisition Handling

2.

OFC COMPANY

Total Budgeted Costs ( February )

Activity	Cost Driver		Budgeted Activity Cost
Storage	Cartons in inventory		698,320		$	0.6020	/carton/month
Requisition handling	Requisitions		784,000			12.25
Pick packing	Lines		1,451,400			1.64
Data entry	Lines		823,050			0.93
	Requisitions		56,400			1.20
Desktop delivery	Per delivery		424,908			36.63

Total Budgeted Cost 4,238,078

TOTAL BUDGETED COST ( MARCH )

Activity	Cost Driver		Budgeted Activity Cost
Storage	Cartons in inventory		698,320		$	0.6020	/carton/month
Requisition handling	Requisitions		768,000			12
Pick packing	Lines		1,416,000			1.6
Data entry	Lines		805,350			0.91
	Requisitions		55,460			1.18
Desktop delivery	Per delivery		419,920			36.2

TOTAL BUDGETED COST 4,163,050