Question

Company BEH is a wholesale distributor. It uses an ABC system to analyze customer profitability for its small- and medium-sized retail customers. The cost pool, cost driver and other relevant information is shown below.

Cost pool	Costs	Cost driver	Small retailer	Medium retailer
Ordering	300,000	Number of orders	8,000	4,000
Delivery	750,000	Number of deliveries	10,800	4,200
Customer Service	1,200,000	Number of products sold	320,000	480,000
Total overhead	2,250,000

What is the average total overhead cost per product sold to the small retailers? (Assuming every item sold requires certain involvement of customer service.)

Answer 1

Cost pool	Costs	Cost driver	Small retailer	Medium retailer	Total	Activity rate	Overhead applied to Small retailer
Ordering	300,000	Number of orders	8,000	4,000	12,000	300,000/12,000 = $25 per order	8,000 x 25 = 200,000
Delivery	750,000	Number of deliveries	10,800	4,200	15,000	750,000/15,000 = $50 per delivery	10,800 x 50 = 540,000
Customer Service	1,200,000	Number of products sold	320,000	480,000	800,000	1,200,000/800,000 = $1.5 per product sold	320,000 x 1.5 = 480,000
Total							1,220,000

Average total overhead cost per product sold to the small retailers = Overhead applied to Small retailer/Number of products sold

= 1,220,000/320,000

= $3.81 (Rounded to two decimals)