The 601 blue Jean Company has decided to allocate the cost of its warehouse and distribution centre to its customers using activity-based costing

The 601 blue Jean Company has decided to allocate the cost of its warehouse and distribution centre to its customers using activity-based costing, In order to better assess profitability by customer. The warehouse manager determines that the only costs that are economically feasible to trace directly to the customer are outbound freight costs. The manager then decides that the following overhead cost pools should be allocated to customers using the following cost drivers:

Overhead Cost Pool

Cost Driver(Allocation Base)

Order Processing Department



Order Filling Department



Quality Control Department

Shipping Department

Number of individual orders processed for that customer

Number of line items on all pull-tickets for that customer

Numbers of cartons shipped to that customer

Number of cartons shipped to that customer



Following are relevant data for each overhead cost pool

Order Processing Department

Total costs of this department

Total number of orders processed



Order Filling Department

Total cost of this department

Total number of line-items on all pull tickets



Quality Control Department

Total cost of this department

Total number of cartons shipped



Shipping Department

Total cost of this department

Total number of cartons shipped



$3,000,000

$200,000





$4,000,000

$4,000,000





$500,000

$2,000,000





$7,500,000

$2,000,000



Following is information pertaining to two customers:

7-9-11 Stores:

Sales revenue for the year

Number of orders

Number of pull ticket line-items

Number of cartons

Outbound freight costs



Men’s Large and Big Stores:

Sales revenue for the year

Number of orders

Number of pull ticket line-items

Number of cartons

Outbound freight costs



$2,400,000

$500

$100,000

$50,000

$75,000





$1,500,000

$250

$20,000

$40,000

$56,000





Required:

A) Compute the overhead rates for each of the four overhead cost pools

B) Calculate the amount of overhead that would be applied to 7-9-11 Stores

C) Calculate the amount of overhead that would be applied to Men’s Large & Big Stores

D) Explain (in one or two sentences) or show (by calculation) how your answer to parts (B) and (C) would change if the company combined Quality Control and Shipping into one overhead cost pool, and allocated overhead for this cost pool to customers based on the number of cartons shipped to that customer.


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