Question

International Gems sells fine jewelry and has implemented activity-based costing. Costs in the shipping department have been divided into three cost pools. The first cost pool contains costs that are related to packaging and shipping. International has determined that the number of boxes shipped is an appropriate cost driver for these costs. The second cost pool is made up of costs related to the final inspection of each item before it is shipped and the cost driver for this pool is the number of individual items that are inspected. The final cost pool is used for general operations of the department and the cost driver is the number of orders. Information about the activities is summarized below:

Cost Pool	Estimated Total Costs			Cost Driver		Estimated Annual Activity
Packaging and shipping	$	67,200			Number of boxes shipped	16,000	boxes
Final inspection		200,000			Number of individual items inspected	100,000	items
General operations		85,000			Number of orders	10,000	orders

A new customer orders two items that can be shipped in a single box. What is the total shipping department cost that will be allocated to this order?

Multiple Choice

• $8.20

• $14.70

• $16.70

• $25.20

• None of the answer choices is correct.

Answer 1

Activity Rate
Activity	Total Overheads	Estimated Activity Level		Rate Per Activity
Packaging and shipping	$                 67,200	16000		$                   4.20
Final inspection	$             2,00,000	100000		$                   2.00
General operations	$                 85,000	10000		$                   8.50

Allocation of overhead for new customer
Activity	Rate Per Activity		Activity Level	Total Overhead
a	b		c	d=b*c
Packaging and shipping	$                   4.20		1	$                          4.20
Final inspection	$                   2.00		2	$                          4.00
General operations	$                   8.50		1	$                          8.50
Total				$                       16.70