Activity Cost Drivers and Cost Estimation Market Street Soup Company produces te
ID: 2343047 • Letter: A
Question
Activity Cost Drivers and Cost Estimation Market Street Soup Company produces ten varieties of soup in large vats, several thousand at a time. The soup is distributed to several categories of customers. Some soup is p large containers and sold to college and university food services. Some is packaged in half-g or small containers and sold through wholesale distributors to grocery stores. Finally, som aged in a variety of individual servings and sold directly to the publicf 4-32. ackaged i In e is p ack rom trucks owned and oper- ated by Market Street Soup Company. Management has always assumed that costs fluctuated with the volume of soup, and cost-estimating equations have been based on the following cost function: Estimated costs Fixed costs + Variable costs per gallon X Production in gallons Lately, however, this equation has not been a very accurate predictor of total costs. At the same time, management has noticed that the volumes and varieties of soup sold through the three distinct distribution channels have fluctuated from month to month. REQUIRED What relevant major assumption is inherent in the cost-estimating equation currently used by Market Street Soup Company? Why might Market Street Soup Company wish to develop a cost-estimating equation that recognizes the hierarchy of activity costs? Explain. Develop the general form of a more accurate cost-estimating equation for Market Street Soup Company. Clearly label and explain all elements of the equation, and provide specific ex- amples of costs for each element. a. b. c.Explanation / Answer
A) presently as per the cost equation used by the company, there is an inherent assumption that fixed cost of the company is same and therefore attributable to all the categories of customer and accordingly fixed cost is allocated to each customer irrespective of it's category.
B) Market street soup company is required to develop a cost estimating equation that recognizes hierarchy of activity cost because each category of customer has different attributes when it comes to selling mechanism. For instance to retail customer trucks are used for selling whose deposit. And repair cost should only be charged to those specific customer and not to other
C) cost formula can be tweaked as
Fixed cost based on activity + variable cost
Activities which can incur fixed cost in case of college students are cost of large container
Activities which can incur fixed cost in case of grocery store are cost of small container, cost of transportation
Activities which can incur fixed cost in case of retail customer are repair and maintenance of truck, dep.
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