Webb Corporation would like to institute an activity-based costing system to pri

Question

Webb Corporation would like to institute an activity-based costing system to price products. The company's Purchasing Department incurs costs of $550,000 per year and has six employees. Purchasing has determined the three major activities that occur during the year.

Activity Allocation Measure # of People Total Cost
Issuing purchase orders # of purchase orders 1 $150,000
Reviewing receiving reports # of receiving reports 2 $175,000
Making phone calls # of phone calls 3 $225,000

During the year, 50,000 phone calls were made in the department; 15,000 purchase orders were issued; and 10,000 shipments were received. Product A required 200 phone calls, 150 receiving reports, and 50 purchase orders. Product B required 350 phone calls, 400 receiving reports, and 100 purchase orders.

a. Determine the amount of Purchasing Department cost that should be assigned to each of these products.
b. Determine Purchasing Department cost per unit if 1,500 units of Product A and 3,000 units of Product B were manufactured during the year.

Explanation / Answer

a. Determine the amount of Purchasing Department cost that should be assigned to each of these products.

$150,000/15,000 = $10 per purchase order
$175,000/10,000 shipments received = $17.50 per receiving report
$225,000/50,000 phone calls = $4.50 per phone call

Product A:
200 phone calls*$4.50 + 150 receiving reports*$17.50 + 50 purchase orders*$10 = $4,025

Product B:
350 phone calls*4.50 + 400 receiving reports*$17.50 + 100 purchase orders*$10 = $9,575

b. Determine Purchasing Department cost per unit if 1,500 units of Product A and 3,000 units of Product B were manufactured during the year.

Product A: $4025/1500 units = $2.68 per unit
Product B: $9,575/3000 units = $3.19 per unit

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