Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 23

Activity-Based Costing of Customers

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	$ 50,000	5,000 orders
Loading truck&	Number of items	100,000	100,000 items
Delivering merchandise	Number of orders	60,000	5,000 orders
Processing invoice	Number of invoices	48,000	4,000 invoices
Total overhead		$258,000

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&	$50,000	$60,000
Number of orders	52	110
Number of items	600	1,500
Number of invoices	12	150

Required

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

---

b.What would the activity-based costing system estimate as the cost of delivering to each customer?

---

c.How could Marvin’s use the information identified by the new costing method to manage costs?

Step 1 of 11

Activity based costing

Activity based costing is modern method used to assign overhead cost to a product or department or to a job. Under this method the cost are allocated based on the activity volume consumed by each department or product. Activity based costing uses multiple activities related to cost and based on these activities cost is allocated.

Formula to calculate activity rate under activity based costing.