Brent Company\'s cost system assigns MSDA expenses to customers using a rate of

Question

Brent Company's cost system assigns MSDA expenses to customers using a rate of 33% of sales revenue. The new CFO has discovered that Brent's customers differ greatly in their ordering patterns and interaction with Brent's sales force. Because the CFO believes Brent's cost system does not accurately assign MSDA expenses to customers, he developed an ABC system and gathered the following information.

Which of the two methods produces more accurate assignments of MSDA expenses to customers? Explain.

Austin Brooke Totals Sales $ 860,000 $ 700,000 $ 1,560,000 Cost of Goods Sold 440,000 310,000 750,000 Sales Representative Travel 1 8,000 84,000 92,000 Service Customers 30,000 220,000 250,000 Handle Customer Orders 2,000 24,000 26,000 Ship to Customers 48,000 144,000 192,000

Explanation / Answer

Answer: The activity-based costing method provides more accurate assignments of marketing, selling, distribution, and administrative expenses by identifying activities consumed by each customer and assigning costs to customers based on their activity usage. In this example, Brooke places smaller orders, orders more frequently, and requires more after-sales support (travel and service support) than Austin does.

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