ScholfieldEnterprises makes a variety of products that it sells to other businesses. The company's activity-based costing system has four activity cost pools for assigning costs to products and customers. Details concerning that activity-based costing system are listed below: The cost of serving customers, $1,191.00 per customer, is the cost of serving a customer for one year.Latif Corporation buys only one of the company's products which ScholfieldEnterprises sells for $15.60per unit. Last year Latif Corporation ordered a total of 1,100units of this product in 2orders. To fill the orders, 7batches were required. The direct materials cost is $7.85per unit and the direct labor cost is $1.90per unit. Each unit requires 0.10 direct labor-hours.According to the activity-based costing system, the total cost of the activity "Processing batches" for this customer this past year was closest to:
A) $967.40
B) $1,020.00
C) $52.60
D) $138.20

Question

ScholfieldEnterprises makes a variety of products that it sells to other businesses. The company's activity-based costing system has four activity cost pools for assigning costs to products and customers. Details concerning that activity-based costing system are listed below:  The cost of serving customers, $1,191.00 per customer, is the cost of serving a customer for one year.Latif Corporation buys only one of the company's products which ScholfieldEnterprises sells for $15.60per unit. Last year Latif Corporation ordered a total of 1,100units of this product in 2orders. To fill the orders, 7batches were required. The direct materials cost is $7.85per unit and the direct labor cost is $1.90per unit. Each unit requires 0.10 direct labor-hours.According to the activity-based costing system, the total cost of the activity "Processing batches" for this customer this past year was closest to:
A) $967.40 
B) $1,020.00 
C) $52.60 
D) $138.20

Quizplus · Accepted Answer

The first step is to calculate the total cost of the batches. According to the information given, 7 batches were required to fill the orders. Using the activity-based costing system, the cost per batch for processing batches is $139. This means that the total cost of the batches is 7 × $139 = $973.

However, the question asks for the cost for this specific customer. According to the information given, Latif Corporation ordered 1,100 units in 2 orders. This means that the total cost of serving this customer for one year is $1,191, which includes the cost of processing batches as well as the other three activity cost pools.

To determine the cost of processing batches just for this customer, we need to use the activity-based costing system to allocate the total cost of serving all customers to this specific customer based on the number of batches it ordered.

The total number of batches for all customers is not given, so we need to make an assumption. Let's assume that the total number of batches for all customers is 1,000. Therefore, the cost of processing batches per batch = $139 and the cost of processing batches per unit = $1.39.

Using this assumption, the total cost of processing batches for this customer is 7 batches × $1.39 per unit × 1,100 units = $10,873.

Next, we need to allocate the total cost of serving all customers to this specific customer. To do this, we divide the total cost of serving all customers ($1,191 per customer) by the total number of units for all customers. Let's assume that the total number of units for all customers is 10,000. Therefore, the cost per unit for serving all customers = $1,191 ÷ 10,000 = $0.1191 per unit.

Using this cost per unit, we can allocate the total cost of serving all customers to this specific customer as follows:

Total cost for this customer = (1,100 units × $0.1191 per unit) + ($10,873 for processing batches) 
= $130.01 + $10,873 
= $11,003.01

Therefore, the cost of processing batches for this customer this past year was closest to $967.40, which is 8.79% of the total cost of serving this customer.

ScholfieldEnterprises Makes a Variety of Products That It Sells to Other