Answer:
$20 per purchase order
Explanation:
Resources in a company are allocated to companies at the beginning of a budgeting period based on consumption estimates. Activity-based costing (ABC) is a method used to identify the activities undertaken by an organisation, assigning the cost of each activity to the goods or services produced or offered by a company based on actual consumption of the related goods or services. The ABC method may support decisions associated with pricing, outsourcing and measurement of process improvements. The method allocates overhead costs of an activity based on cost drivers to determine the activity rate. This rate is then used to allocate costs based on actual consumption.
The overhead cost for the purchasing function of Devon Company is: $14,000
The cost driver is given as the number of purchase orders: 300(A) and 400(B)
The activity rate for the purchasing pool is therefore: $14,000/700 = $20 per order
Application:
If the actual purchase orders were below the estimated amount : say the orders for A were 250 and the actual purchase orders for B were 95, then the total cost of the purchasing function for the period would be (250 * $20) +(95*$20 = $6900 which would be below the $14,000 budget. That would signal that management would need to reassess and lower the resources allocated to the purchasing function during the next budgeting period.
If the actual orders were above the estimated amounts: say the orders for A were 450 and orders for B were 310 then the total cost incurred by the purchasing function would be (450 * $20) + (310 * $20) = $15200 which is above the budget. This would signal that there could be areas for process improvement to avoid redundancies arising from duplication of orders, loss of orders among other process inefficiencies.
