1. The reason for the company to make losses is that it is incurring costs on certain customers in excess of than what it assesses by its method of cost estimation based on general percentages. In order to find the solution, it is required to estimate the costs using ABC estimation method. Same is undertaken below.
2. The first step is to estimate the unit cost of services extended by the company on its value adding processes.
|Sl. No |Activity |No. of operations |Cost Incurred |Ref of cost given |Unit Cost |
| | | |(USD) |in column: 4 |(USD) ...view middle of the document...
Explanation of working out the cost shown in column 5 of table above is given below.
a) Handling of cartons in warehouse:-This has two components. Cost of personnel used in warehouse operations and cost of warehouse excluding personnel expense.
i) Cost of Warehouse excluding personnel is USD 2000000
ii) Only 90% of warehouse personnel are used for handling of cartons in warehouse. So personnel expense towards the same is 0.9 X USD 2400000 = USD 2160000.
iii) Total expense is USD 2000000+USD2160000=USD4160000.
b) Cost of freight for shipping cartons is given as USD 450000 in exhibit 2.
c) Desktop delivery:-This also has two constituents. Cost of labour used to drive the trucks and expense incurred on running of trucks.
i) 10% of warehouse labour is used for desktop delivery. So the cost of labour for desktop delivery is 0.1XUSD2400000=USD240000.
ii) Delivery truck expense as given in exhibit 1 is USD200000.
iii) Total cost for desktop delivery is USD 240000 + USD200000 = USD440000.
d) Data Entry Costs:-Total cost of data entry is USD800000. The entire data entry operation has taken 10000 hours in the year, amounting to USD80 per hour. The activities comprising of data entry are as given below.
|Sl. No |Activity |Usage hours |Cost incurred @ USD80 per |
| | | |hour (USD) |
|(i) |Set up of manual orders |2000 |160000 |
|(ii) |Enter individual order lines |7500 |600000 |
|(iii) |Validate EDI ? Internet orders |500 |40000 |
e) General & selling Expense is given in exhibit 1 as USD2000000.
4. The next step is to calculate the cost incurred by customer A and B using the unit cost derived in table:1.Same is shown in table 3 below.
|Sl. No |Services Availed |Customer A |Customer B |