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 2016 for the Business Services division are:

Activity	Cost Driver	Budgeted Activity			Cost-Driver Rate
Storage	Cartons in inventory		520,000		$	0.6320	/carton/month
Requisition handling	Requisitions		54,000			21.50
Pick packing	Lines		860,000			1.68
Data entry	Lines		860,000			0.81
	Requisitions		42,000			1.39
Desktop delivery	Per delivery		18,000			43.00

For the month, the division expects to make 11,100 deliveries to deliver 1,110,000 cartons to customers.

Required:

1.	What is the total budgeted cost for each activity and for the Business Services division in January 2016?

	Activity Total Cost Storage Requisition handling Pick packing Data entry - Lines Data entry - Requisitions Desktop delivery Total budgeted cost for the division

    

2.

Assume, in contrast to requirement 1, that activity-related information was not available. Rather, the only information available is the budgeted fixed costs for the month are $1,042,000, and the budgeted variable cost per carton is estimated as $2.60. What is the budgeted total cost for the month using this single volume-based approach?

    

3.

Dories Supply Chain Management Company offers to install an electronic order-processing system that transmits customer requisitions via the Internet to the Business Services division for immediate pick, packing, and delivery. No requisition handling and data entry will be needed once the system is fully functional.

a.	How much savings can the Business Services division expect from switching to the new system before considering the payment to Dories?

	Expected cost savings,Jan 2016

         

Answer 1

Answer 1.
Activity	Budgeted Volume	Cost Driver Rate	Total Cost
Storage	520,000.00	0.6320	328,640.00
Requisition Handling	54,000.00	21.50	1,161,000.00
Pick Packing	860,000.00	1.68	1,444,800.00
Data Entry	860,000.00	0.81	696,600.00
	42,000.00	1.39	58,380.00
Desktop Delivery	18,000.00	43.00	774,000.00
Total Budgeted Cost for the Division			4,463,420.00
Answer 2.
Budgeted Cost for the Month:
Budgeted Fixed Cost	1,042,000.00
Variable - $2.60 X 1,110,000 Cartons	2,886,000.00
Total	3,928,000.00
Answer 3.
Expected Savings in Costs:
Requisition Handling	1,161,000.00
Data Entry - No. of Lines	696,600.00
Data Entry - No. of requisition	58,380.00
Expected Cost Savings	1,915,980.00