Garber Company uses a traditional activity based costing system to assign $600,000 of committed resource costs for customer service, based on the following information gathered from interviews with customer service personnel:
|
Activity |
Time Percentage |
Estimated Cost Driven Quantity |
|
Handle customer orders |
75% |
8,000 customer orders |
|
Process customer complaints |
10% |
400 customer complaints |
|
Perform customer credit checks |
15% |
450 credit checks |
|
100% |
Required:
(a) Compute the activity cost driver rates using this system.
(b) Suppose instead that Garber uses time driven activity based costing to assign $600,000 of committed resource costs to the three activities. Compute the time driven activity cost driver rates assuming 10,000 hours of useful work and the unit time estimates below.
|
Activity |
Unit Time (Hours) |
|
Handle customer orders |
0.75 |
|
Process customer complaints |
3.50 |
|
Perform customer credit checks |
3.00 |
(c) Suppose that the quantities of activities this period are 8,000 customer orders, 400 customer complaints, and 450 credit checks. Using the information and activity cost driver rates developed in part (b), determine the cost assigned to each of the activities and the estimated hours of unused capacity, as well as the associated cost. What actions might managers take upon evaluating such information?
(d) Suppose that in the next time period, the quantities of activities change to 8,500 customer orders, 350 customer complaints, and 500 credit checks. Using the information and activity cost driver
Rates developed in part (b), determine the cost assigned to each of the activities and the estimated hours of unused capacity, as well as the associated cost.
(e) Explain why the activity cost driver rates computed in (a) are different from the rates computed in (b)