Question

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:
Activity Cost Driver Cost Driver Volume

Processing order Number of orders $ 75,000 5,000 orders

Loading truck Number of items 150,000 100,000 items

Delivering merchandise Number of orders 90,000 5,000 orders

Processing invoice Number of invoices 72,000 4,000 invoices

Total overhead $ 387,000

Two of Marvin's customers are City Diner and Le Chien Chaud. Data for orders and deliveries to these two customers follow:

City Diner Le Chien Chaud

Order value $ 75,000 $ 90,000

Number of orders 52 110

Number of items 600 1,500

Number of invoices 12 150

Required: a. What would the delivery charge for each customer be under the current policy of 10 percent of order value? b. Calculate the cost of each activity for both restaurants to determine the total activity-based costing estimate of the cost of delivering to each customer. (Do not round intermediate calculations.)

Answer 1

Answer and Explanation:

a. The delivery charge for each customer is below:-

                                        City Diner       Le Chien Chaud

Delivery charge               $7,500                  $9,000

                                  ($75,000 × 0.10)          ($90,000 × 0.10 )

b. The cost of each activity

                         Activity cost      City Diner         Le Chien Chaud

processing                  15                    780                       1,650

                          ($75,000 ÷ 5,000)  (15 × 52)             (110 × 15)

Loading truck             1.5                   900                   2,250      

                 (150,000 ÷ 100,000)   (600 × 1.5)         (1500 × 1.5)

Delivering               18                               936                    1,980

                       (90,000 ÷ 50,00)          (52 × 18)             (18 × 110)

invoice                             18                    216                      2,700        

                         (72,000 ÷ 4,000)          (12 × 18)          (150 × 18)

Total cost                                               2,832                  8,580