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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

Part 1

Storage	Batch Level
Pick packing	Unit-Level
Data entry—Lines	Unit-Level
Requisition handling	Batch Level
Data entry—Requisitions	Batch Level
Desktop delivery	Batch Level

Part 2

	total budgeted costs
February	$4224097.70
March	$3379278.16

Activity	Budgeted Activity	Cost-Driver Rate	Cost Reduction	New C-D Rate	New Cost
Storage	570000	0.6020	2%	0.5900	336300.00
Requisition handling	64000	12.50	2%	12.2500	784000.00
Pick packing	885000	1.68	1%	1.6632	1471932.00
Data entry—Lines	885000	0.95	1%	0.9405	832342.50
Data entry—Requisitions	47000	1.22	2%	1.1956	56193.20
Desktop delivery	20500	37.00	2%	36.2600	743330.00
Total Budgeted Cost - Business Services Division	4224097.70

New C-D rate = Cost – Driver rate *(1-Cost reduction rate)

New cost = budgeted activity * New C-D rate

Activity	Budgeted Activity	Feb C-D Rate	March C-D Rate	New Cost
Storage	269040.00	269040.00	269040.00	269040.00
Pick packing	627200.00	627200.00	627200.00	627200.00
Data entry—Lines	1177545.60	1177545.60	1177545.60	1177545.60
Requisition handling	665874.00	665874.00	665874.00	665874.00
Data entry—Requisitions	44954.56	44954.56	44954.56	44954.56
Desktop delivery	594664.00	594664.00	594664.00	594664.00
Total Budgeted Cost - Business Services Division	3379278.16

March C-D Rate = Feb C-D Rate *(1-Cost reduction rate)

New cost = budgeted activity * March C-D Rate