Question - Activity-Based Costing for 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 of 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 delivers to these two customers follow:
City Diner Le Chien Chaud
Order Values $50,000 $60,000
Number of orders 52 110
Number of items 600 1,500
Number of invoices 12 150
What would the delivery charge for each customer be under the current policy of 10 percent of order value?
What would the activity-based costing system estimate as the cost of delivering to each customer?
How could Marvin's use the information identified by the new costing method to manage costs?