Question

Activity-Based Customer Costing Dormirbien Company produces mattresses for 20 retail outlets. Of the 20 retail outlets, 19 are small, separately owned furniture stores and one is a retail chain. The retail chain buys 60% of the mattresses produced. The 19 smaller customers purchase mattresses in approximately equal quantities, where the orders are about the same size. Data concerning Dormirbien's customer activity are as follows:

Large RetailerSmaller Retailers Units purchased Orders placed Number of sales calls Manufacturing costs Order filling costs allocated* Sales force costs allocated* 36,000 12 6 $14,400,000 $484,800 $240,000 24,000 1,200 294 $9,600,000 $323,200 160,000 Currently allocated on sales volume (units sold) Currently, customer-driven costs are assigned to customers based on units sold, a unit-level driver.

Required:

Assign costs to customers by using an ABC approach. Round activity rates to at least three decimals and round activity costs to the nearest dollar.

Order filling rate	$ per order
Selling call rate	$ per sales call
Cost assignment:
Large retailer	$
Smaller retailers

Answer 1

Calculate activity rate and activity cost

Overhead	Overhead cost	cost driver	expected activity	activity rate	Large retailer	Smaller retailers
Order filling	808000	No of order	1212	$666.667 per order	8000	800000
Selling call	400000	No of sales call	300	$1333.333 per sales call	8000	392000
Cost assigned					16000	1192000