rehouse (RAW) delivers appliances to retailers throughout the city. The firm adds 6 percent to the cost of the appliances to cover the delivery cost. The delivery fee is meant to cover the cost of delivery. The finance team at RAW has analyzed the delivery service using activity-based costing methods and identified four activities. Data on these activities follow: Activity Cost Driver Activity Cost Cost Driver Volume Processing order Number of orders $ 42,000 3,000 orders Loading truck Number of items 171,000 95,000 items Delivering order Number of orders 51,000 3,000 orders Billing Number of invoices 34,000 2
Rupert’s Appliance Warehouse (RAW) delivers appliances to retailers throughout the city. The firm adds 6 percent to the cost of the appliances to cover the delivery cost. The delivery fee is meant to cover the cost of delivery. The finance team at RAW has analyzed the delivery service using activity-based costing methods and identified four activities. Data on these activities follow:
| Activity | Cost Driver | Activity Cost | Cost Driver Volume | |
|---|---|---|---|---|
| Processing order | Number of orders | $ 42,000 | 3,000 | orders |
| Loading truck | Number of items | 171,000 | 95,000 | items |
| Delivering order | Number of orders | 51,000 | 3,000 | orders |
| Billing | Number of invoices | 34,000 | 2,000 | invoices |
| Total |
$ 298,000 |
Two of Rupert's customers are McLean Designs and Neveux Appliances. Data for orders and deliveries to these two customers follow:
| McLean Designs | Neveux Appliances | |
|---|---|---|
| Order value (total) | $ 76,000 | $ 86,000 |
| Number of orders | 56 | 136 |
| Total number of items | 400 | 1,600 |
| Number of invoices | 10 | 130 |
Required:
- What would the delivery charge for each customer be under the current policy of 6 percent of order value?
- What would the activity-based costing system estimate as the cost of delivering to each customer?
The ABC method of costing allocates indirect costs to goods or activities based on the individual activities and cost drivers that contribute to those costs. This method gives a more precise and complete insight of an organization's cost structures, enabling for better decision-making and cost management.
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