Question

Marvin’s Kitchen Supply delivers restaurant supplies throughout the city. The firm adds 10 percent to the cost of the supplies to cover the delivery cost. The delivery fee is meant to cover the cost of delivery. A consultant has analyzed the delivery service using activity-based costing methods and identified four activities. Data on these activities follow.

Cost Driver Volume

Activity	Cost Driver	Cost	Driver Volume
Processing order	Number of orders	$ 105,000	7,000 orders
Loading truck	Number of items	285,000	190,000 items
Delivering Merchandise	Number of orders	126,000	7,000 orders
	Number of invoices	108,000	6,000 invoices
Total overhead		$ 624,000

Two of Marvin's customers are City Diner and Le Chien Chaud. Data for orders and deliveries to these two customers follow.

	City Diner	Le Chien Chaud
Order value	$ 87,000	$ 97,000
Number of orders	67	290
Number of items	500	1,700
Number of invoices	15	190

Required:

a. What would the delivery charge for each customer be under the current policy of 10 percent of the order value?

b. Calculate the cost of each activity for both restaurants to determine the total activity-based costing estimate of the cost of delivering to each customer.

Answer 1

Delivery Charges under current Policy $ Order Value Multiply Percentage of Order value Delivery Charge City Diner 87,000 10% 8,700 Le Chien Chaud $ 97,000 10% $ 9,700 b Calculate Activity Rate Activity cost pool Expected use of cost driver Activity based overhead rate Estimated Overhead Processing Order Loading Truck Delivering Merchandise Processing Invoice 105,000 285,000 126,000 108,000 624,000 7,000 190,000 7,000 6,000 $ $ $ $ 15.00 Per order 1.50 Per Item 18.00 Per order 18.00 Per invoice (A) (A)(B) (A) (B) Activity cost pool (B) City Diner Activity based Expected Cost driver overhead rate 67 $ 15.00 500 $ 1.50 67 $ 18.00 15 $ 18.00 (A) (B) Le Chien Chaud Expected Cost Activity based driver overhead rate $ 290 $ 15.00 $ 1,700 $ 1.50 $ 290$ 18.00 $ 190 $ 18.00 Cost Assigned $ 1,005 $ 750 $ 1,206 $ 270 Processing Order Loading Truck Delivering Merchandise Processing Invoice Cost Assigned $ 4,350 $ 2,550 $ 5,220 $ 3,420 Total Cost under ABC 3,231 $ 15,540