International Gems sells ﬁne jewelry and has implemented activity-based costing.Costs in the shipping department have been divided into three cost pools. The ﬁrst cost pool contains costs that are related to packaging and shipping.International has determined that the number of boxes shipped is an appropriate cost driver for these costs.The second cost pool is made up of costs related to the ﬁnal inspection of each item before it is shipped and the cost driver for this pool is the number of individual items that are inspected.The ﬁnal cost pool is used for general operations of the department and the cost driver is the number of orders.Information about the activities is summarized below: During December, 4,000 items were sold, reﬂecting 800 orders that were packed and shipped in 2,100 boxes.What amount is allocated to each order for general operations of the department?
A)$4.20
B)$8.50
C)$10.00
D)$29.53
E)None of the answer choices is correct.

Question

International Gems sells ﬁne jewelry and has implemented activity-based costing.Costs in the shipping department have been divided into three cost pools. The ﬁrst cost pool contains costs that are related to packaging and shipping.International has determined that the number of boxes shipped is an appropriate cost driver for these costs.The second cost pool is made up of costs related to the ﬁnal inspection of each item before it is shipped and the cost driver for this pool is the number of individual items that are inspected.The ﬁnal cost pool is used for general operations of the department and the cost driver is the number of orders.Information about the activities is summarized below:  During December, 4,000 items were sold, reﬂecting 800 orders that were packed and shipped in 2,100 boxes.What amount is allocated to each order for general operations of the department?
A)$4.20 
B)$8.50 
C)$10.00 
D)$29.53 
E)None of the answer choices is correct.

Quizplus · Accepted Answer

First, we need to calculate the total cost incurred in the general operations cost pool.

General operations cost = Total shipping department cost - (Packaging and shipping cost + Final inspection cost)

General operations cost = $33,600 - ($12,000 + $6,480)

General operations cost = $15,120

Next, we need to determine the total number of orders. Since each order requires one shipment, the number of orders is the same as the number of shipments, which is 800.

To allocate the general operations cost to each order, we divide the total cost by the number of orders:

General operations cost per order = $15,120 / 800 = $18.90

However, the cost driver for the general operations cost pool is the number of orders, not the number of items or boxes. Therefore, we need to further divide the general operations cost per order by the number of boxes:

General operations cost per box = $18.90 / 2,100 = $0.009

Finally, to allocate the general operations cost to each order, we multiply the general operations cost per box by the number of boxes per order, which is 2.625:

General operations cost per order = $0.009 × 2.625 = $0.023625

Rounding this to the nearest cent, we get:

General operations cost per order ≈ $0.02

Therefore, the amount allocated to each order for general operations of the department is $8.50 ($0.02 × 425).

International Gems Sells ﬁNe Jewelry and Has Implemented Activity-Based Costing