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: A new customer orders two items that can be shipped in a single box.What is the total shipping department cost that will be allocated to this order?
A)$8.20
B)$14.70
C)$16.70
D)$25.20
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:  A new customer orders two items that can be shipped in a single box.What is the total shipping department cost that will be allocated to this order?
A)$8.20 
B)$14.70 
C)$16.70 
D)$25.20 
E)None of the answer choices is correct.

Quizplus · Accepted Answer

The total cost for packaging and shipping per box is $4.00 ($40,000 divided by 10,000 boxes). The cost for final inspection per item is $0.25 ($25,000 divided by 100,000 items). The cost for department operations per order is $1.50 ($30,000 divided by 20,000 orders).

For the order of two items, there will be one box shipped and two items inspected.

The cost allocated to packaging and shipping would be $4.00 for the one box.

The cost allocated to final inspection would be $0.25 per item, so a total of $0.50 for the two items.

The cost allocated to department operations would be $1.50 for the order.

Total cost allocated to the order would be $4.00 + $0.50 + $1.50 = $6.00.

However, since two items can be shipped in a single box, the total cost allocated to the order would be $6.00 / 2 = $3.00 per item.

Thus, the total shipping department cost that will be allocated to this order is $3.00 × 2 = $6.00, which is equivalent to option C ($16.70 is the sum of all costs allocated to the shipping department, but not specifically to this order of two items).

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