Budgeting and cost drivers Dinkum Company provides package courier services. Each afternoon its couriers pick up packages; they drive trucks operat¬ ing out of local terminals. Packages are returned to the terminal and are transported to the central hub that evening. In the hub, packages are sorted during the late evening and are sent to the destination terminal overnight. The next morning couriers from the destination terminal deliver packages to the addresses.

Most of the routes that the couriers follow are fixed. Each day the couriers have both scheduled and unscheduled pickup and drop-off stops. However, studies have shown that adding an unscheduled stop to a route or picking up an additional shipment at a scheduled stop creates negligible additional costs. The key costs in terms of the courier's time, the vehicle, and the fuel costs are determined by the route itself. Therefore, most of the costs at Dinkum result from decisions that reflect the planned level of activity rather than decisions that reflect the actual volume of activity. The major exception is the sorting cost in the hubs and terminals. Because sorting labor is hired on a part-time basis as required, the sorting cost varies with the number of shipments handled.

Linda Price, the manager of the Miami terminal, is preparing an expense budget for the upcoming year. She plans to base this year's budget on the trends from the previous years. The following table shows the level of costs in the previous two years.

REQUIRED

(a) Identify what you think are the cost drivers for each of the items in this table.

(b) Given the information provided, prepare an expense budget for the up¬ coming year, assuming that the volume of shipments handled is expected to be 14,000,000 units.

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DINKUM COURIER COMPANY ACTIVITY COST LEVELS ITEM Shipments handled Administrative costs 1998 8,500,000 1999 10,300,000 2000 11,100,000 $ 300,000 $ 315,000 $ 320,000 Truck depreciation and maintenance $ 750,000 $ 830,000 $ 850,000 Courier fuel costs $ 600,000 $ 660,000 Courier wages $1,750,000 Terminal support costs $ 240,000 Labor costs in terminal $ .120,000 $1,810,000 $ 280,000 $ 150,000 $ 670,000 $1,850,000 $ 260,000 $ 170,000