Question
E-Power Deliveries owns a fleet of electric vehicles that it uses to make deliveries and pickups for customers in the city of Kitchener, Ontario. The
E-Power Deliveries owns a fleet of electric vehicles that it uses to make deliveries and pickups for customers in the city of Kitchener, Ontario. The company limits its services to overnight deliveries within the surrounding Waterloo region. The company president, Andre Kuvinder, is concerned because of a recent negative trend in net income despite a growing number of customers. In an effort to resolve this situation, he is looking for accounting assistance to better understand operational costs.
Andre has hired a recently designated CPA to help him solve the dilemma. The CPA has decided to implement an activity-based costing system designed to provide relevant information to assist with decision making. The ABC system she designed has four activity cost pools: Travel (from customer to package recipient), Pickup and Delivery, Customer Service, and Other. The activity measures are kilometres for the Travel cost pool, number of pickups and deliveries for the Pickup and Delivery cost pool (includes repeat deliveries if required), and number of customers for the Customer Service cost pool. The Other cost pool has no activity measure.
The following actual costs will be assigned using the activity-based costing system:
Driver wages
$245,000
Vehicle operating expense
12,800
Vehicle depreciation
70,000
Dispatch personnel salaries
80,000
Office expenses
28,000
Administrative expenses
69,000
Total
$504,800
The distribution of resource consumption across the activity cost pools is as follows:
Activity Cost Pools
Travel
Pickup and Delivery
Customer Service
Other
Total
Distribution:
Driver wages
85%
10%
5%
0%
100%
Vehicle operating expense
80%
20%
0%
0%
100%
Vehicle depreciation
80%
20%
0%
0%
100%
Dispatch personnel salaries
0%
0%
95%
5%
100%
Office expenses
0%
10%
65%
25%
100%
Administrative expenses
0%
15%
75%
10%
100%
The activity measures and activity levels are presented below:
Activity Cost Pool:
Activity Measure
Expected Activity
Travel
Kilometres
64,600
Pickup and Delivery
Customer calls
2,750
Customer Service
Number of customers
82
Other
No activity measure
To get started Andre has asked that just two customers be reviewed before applying the analysis to the rest of the companys customer list. The actual activity for the two customers was determined to be:
Activity data for the following two customers:
Mar Supply Co.
Hep Homes Inc.
Kilometres travelled for pickup/deliveries
185
392
Number of pickups
8
22
To date, E-Power Deliveries has charged a fixed annual fee for each customer if the customer agreed to give the company all of its overnight delivery business. The annual fee charged to each customer is $3,800.
Required:
1. Allocate the actual spending from the traditional general ledger accounts to the cost pools set up by the CPA. 2. Use the activity measures and actual activity to calculate activity rates. 3. Calculate the cost to service each of the two customers highlighted by the company president. 4. Is the companys practice of charging a flat fee per customer likely to be contributing to the declining profit? Explain.
E-Power Deliveries owns a fleet of electric vehicles that it uses to make deliveries and pickups for customers in the city of Kitchener, Ontario. The company limits its services to overnight deliveries within the surrounding Waterloo region. The company president, Andre Kuvinder, is concerned because of a recent negative trend in net income despite a growing number of customers. In an effort to resolve this situation, he is looking for accounting assistance to better understand operational costs.
Andre has hired a recently designated CPA to help him solve the dilemma. The CPA has decided to implement an activity-based costing system designed to provide relevant information to assist with decision making. The ABC system she designed has four activity cost pools: Travel (from customer to package recipient), Pickup and Delivery, Customer Service, and Other. The activity measures are kilometres for the Travel cost pool, number of pickups and deliveries for the Pickup and Delivery cost pool (includes repeat deliveries if required), and number of customers for the Customer Service cost pool. The Other cost pool has no activity measure.
The following actual costs will be assigned using the activity-based costing system:
Driver wages | $245,000 |
Vehicle operating expense | 12,800 |
Vehicle depreciation | 70,000 |
Dispatch personnel salaries | 80,000 |
Office expenses | 28,000 |
Administrative expenses | 69,000 |
Total | $504,800 |
The distribution of resource consumption across the activity cost pools is as follows:
| Activity Cost Pools |
| |||
|
|
| |||
| Travel | Pickup and Delivery | Customer Service | Other | Total |
Distribution: |
|
|
|
|
|
Driver wages | 85% | 10% | 5% | 0% | 100% |
Vehicle operating expense | 80% | 20% | 0% | 0% | 100% |
Vehicle depreciation | 80% | 20% | 0% | 0% | 100% |
Dispatch personnel salaries | 0% | 0% | 95% | 5% | 100% |
Office expenses | 0% | 10% | 65% | 25% | 100% |
Administrative expenses | 0% | 15% | 75% | 10% | 100% |
The activity measures and activity levels are presented below:
Activity Cost Pool: | Activity Measure | Expected Activity |
Travel | Kilometres | 64,600 |
Pickup and Delivery | Customer calls | 2,750 |
Customer Service | Number of customers | 82 |
Other | No activity measure |
To get started Andre has asked that just two customers be reviewed before applying the analysis to the rest of the companys customer list. The actual activity for the two customers was determined to be:
Activity data for the following two customers: | Mar Supply Co. | Hep Homes Inc. |
Kilometres travelled for pickup/deliveries | 185 | 392 |
Number of pickups | 8 | 22 |
To date, E-Power Deliveries has charged a fixed annual fee for each customer if the customer agreed to give the company all of its overnight delivery business. The annual fee charged to each customer is $3,800.
Required:
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