Essay About Warehouse80000 Cartons4160000Para And Method Of Cost Estimation

Accounting Dakota
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.                                                Table 1        Sl. NoActivityNo. of operationsCost Incurred(USD)Ref of cost given in column: 4Unit Cost(USD)123456AHandling of cartons in Warehouse80000 cartons4160000Para 3(a)52/ CartonBShipping of cartons by freight75000 cartons450000Para 3(b)6/ cartonCDesktop delivery2000 dly440000Para 3(c)220/ dlyDSet up of manual order16000 orders160000Para 3(d)(i)10/orderEEnter individual lines of each order150000 lines600000Para 3(d)(ii)4/lineFValidate EDI orders8000 orders40000Para 3(d)(iii)5 / orderGGeneral & Selling ExpenseUSD 42500000 of Annual Sales200000Para 3(e)0.47% of sales3.         Explanation of working out the cost shown in column 5 of table above is given below.Handling of cartons in warehouse:-This has two components. Cost of personnel used in warehouse operations and cost of warehouse excluding personnel expense.Cost of Warehouse excluding personnel is USD 2000000Only 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.Total expense is USD 2000000+USD2160000=USD4160000.Cost of freight for shipping cartons is given as USD 450000 in exhibit 2.Desktop delivery:-This also has two constituents. Cost of labour used to drive the trucks and expense incurred on running of trucks.10% of warehouse labour is used for desktop delivery. So the cost of labour for desktop delivery is 0.1XUSD2400000=USD240000.Delivery truck expense as given in exhibit 1 is USD200000.Total cost for desktop delivery is USD 240000 + USD200000 = USD440000.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.Table 2Sl. NoActivityUsage hoursCost incurred @ USD80 per hour (USD)(i)Set up of manual orders2000160000(ii)Enter individual order lines7500600000(iii)Validate EDI ? Internet orders50040000General & selling Expense is given in exhibit 1 as USD2000000.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.Table 3Sl. NoServices AvailedCustomer ACustomer BQtyCost (USD)QtyCost (USD)(a)Handling of cartons in warehouse @ USD 52 per carton200 cartons1040020010400(b)Shipping by commercial freight @ USD6 per carton2001200NilNil(c)Desktop delivery service @ USD220 per deliveryNilNil25 dly5500(d)Set up of manual orders @USD10 per order6 orders60100 orders1000(e)Entry of lines in manual order @ USD4 per line60 lines240180 lines720(f)Validation of EDI orders @ USD5 per order6 orders30NilNil(g)General & Selling expense @ 0.47% of annual salesSales worth USD 103000484Sales worth USD 104000489(h)Credit charges @ 10% per annum on receivablesUSD 9000 for 1month75USD 30000 for 3 months750(j)Total CostUSD 12489USD 18859