Question

Winnie Company had the following activities, traceable costs, and physical flow of driver units:

Activities	Traceable Costs	Physical Flow of Driver Units
Account inquiry (hours)	$400,000	10,000 hours
Account billing (lines)	$280,000	4,000,000 lines
Account Verification (accounts)	$150,000	40,000 accounts
Correspondence (hours)	$50,000	4,000 letters

The above activities are used by departments A and B as follows:

	Department A	Department B
Account inquiry (hours)	2,000 hours	4,000 hours
Account billing (lines)	400,000 lines	200,000 lines
Account Verification (accounts)	10,000 accounts	8,000 accounts
Correspondence (hours)	1,000 letters	1,600 letters

How much of correspondence costs will be assigned to Department B?

	A.	$50,000
	B.	$12,500
	C.	$20,000
	D.	$1,600

Answer 1

Answer :. C. $20,000.

Working note:

Solution for the question is based on Activity based costing , where major activities of the organisation are identified (also known as cost driver) cost related to those activities also identified. Then such cost is allocated to various departments based on no. Of activities taking place in these departments.

Accordingly, we have been given total traceable correspondence hour cost is $ 50,000

And Physical driver or activity is letter which in total is 4000 letters

So first we should arrive at correspondence cost per physical driver ,which will be given by farmula

Total traceable cost for the activities/Total no.of the activities or driver

Accordingly

Correspondence cost per letter would be

$50,000/4000letter

=$12.50 per letter

Now total activity related to letter in department B is 1600 letter

So total traceable correspondence cost assignment to department B would be as below:

1600letter * $12.50= $20,000(which is our answer)