DAKOTA OFFICE PRODUCTS
The reason for the company to make losses is that it is incurring costs on certain customers in excess of than what it assesses by its method of cost estimation based on general percentages. In order to find the solution, it is required to estimate the costs using ABC estimation method. Same is undertaken below.
The first step is to estimate the unit cost of services extended by the company on its value adding processes.
Sl. No | Activity | No. of operations | Cost Incurred($) | Unit Cost($) |
A | Handling of cartons in Warehouse | 80000 cartons | 4160000 | 52/ Carton |
B | Shipping of cartons by freight | 75000 cartons | 450000 | 6/ carton |
C | ...view middle of the document...
Total cost for desktop delivery is $ 240000 + $200000 = $440000.
Data Entry Costs:-Total cost of data entry is $800000. The entire data entry operation has taken 10000 hours in the year, amounting to $80 per hour. The activities comprising of data entry are as given below.
Sl. No | Activity | Usage hours | Cost incurred @ $80 per hour ($) |
(i) | Set up of manual orders | 2000 | 160000 |
(ii) | Enter individual order lines | 7500 | 600000 |
(iii) | Validate EDI ? Internet orders | 500 | 40000 |
General & selling Expense is given in exhibit 1 as $2000000.
The next step is to calculate the cost incurred by customer A and B using the unit cost derived in above table 1 .Same is shown in table 3 below.
Sl. No | Services Availed | Customer A | Customer B |
| | Qty | Cost ($) | Qty | Cost ($) |
(a) | Handling of cartons in warehouse @ $ 52 per carton | 200 cartons | 10400 | 200 | 10400 |
(b) | Shipping by commercial freight @ $6 per carton | 200 | 1200 | Nil | Nil |
(c) | Desktop delivery service @ $220 per delivery | Nil | Nil | 25...