Question

Activity-Based Customer Costing

Sleepeze 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 Sleepeze’s customer activity are as follows:

	Large Retailer		Smaller Retailers
Units purchased	108,000		72,000
Orders placed	36		3,600
Number of sales calls	18		882
Manufacturing costs	$43,200,000		$28,800,000
Order filling costs allocated*	$1,527,120		$1,018,080
Sales force costs allocated*	$837,000		$558,000
*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 your answers and all intermediate calculations to the nearest dollar.

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

Answer 1

Under ABC approach, the overhead costs are assigned as per the relevant cost driver.

Order filling rate = total order filling cost/number of orders

= 2,545,200/3,636

=$700 per order

Selling call rate = total sales force cost/number of sales calls

= 1,395,000/900

=$1,550 per sales call

Cost assignment

Large Retailer

Order filling cost = 700*36 =$25,200

Sales force cost = 1,550*18 =$27,900

Total =$53,100

Small retailers

Order filling cost = 700*3600 =$2,520,000

Sales force cost = 1,550*882 =$1,367,100

Total =$3,887,100