Question

Benton Company is preparing its annual profit plan. As part of its analysis of the cost of its purchasing activity, management estimates that the $46,000 for purchasing support should be assigned to the individual vendors from the information given as follows:

	Vendor A	Vendor B
Units purchased	180,000	280,000
Purchase orders (annual)	5	20
Number of shipments received	15	60

What is the amount of the purchasing costs that should be allocated to Vendor B, assuming Benton uses purchases orders to compute activity-based costs?

Answer 1

Answer:

Amount of the purchasing costs that should be allocated to Vendor B = $36,800 ---->Refer working note 1

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Working note 1 - Allocation of overhead to both the vendors using activity rate
Activity Cost Pools	Activity Rate [Refer working note 1]		Vendor A			Vendor B
			Activity level		Overhead allocated (Activity Rate x Activity level)	Activity level		Overhead allocated (Activity Rate x Activity level)
purchasing activity	$1,840	per purchase order	5	purchase orders	$9,200	20	purchase orders	$36,800

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Working note 2 - Calculation of Activity rate
Purchasing activity cost                     (a)	$46,000
Total number of purchase orders       (b)	25
Activity rate                                      (a / b)	$1,840	per purchase order

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Note:

Amount of the purchasing costs that should be allocated to Vendor A = $9,200