Question 1 Background

Packit Ltd stores finished products in bulk on behalf of its customers. When the products are required for sale Packit Ltd packs them in accordance with its customers' instructions. The company is currently in the process of determining budgeted costs by customer category for the forthcoming financial year.

Packit Ltd categorises its customers according to the relative fragility of their products. It has three customer categories: Robust, Standard and Delicate. As the names suggest, the customers in the Robust category have the most resilient products, the customers in the Delicate category have the most fragile products and the products of the customers in the Standard category fall between those two extremes.

Budget Information - Forthcoming Financial Year

The volume of work performed for each category of customer is measured in terms of cubic metres of product handled. The budgeted volumes by customer category for the forthcoming financial year are as follows:

	Robust	Standard	Delicate
Budgeted volume of products to be handled	90,000	135,000	75,000
(in cubic metres)

Budgeted packaging costs for the forthcoming financial year in respect of each of the customer categories have been determined as follows: Robust: 990,000, Standard: 1,957,500 and Delicate: 1,875,000.

Other operational costs for the forthcoming period have been budgeted to be as follows:

Labour - basic hours	1,050,000
Labour - overtime hours	90,000
Occupancy	1,500,000
Clerical and administration	180,000

Activity Based Review

An activity based review of the company's operations has identified three key activities: Receipt and Inspection, Warehousing and Packing. It has been determined that it would be reasonable to allocate operational costs to these key activities in the following proportions:

	Receipt & Inspection	Warehousing	Packing
Labour - basic hours	20%	15%	65%
Labour - overtime hours	45%	20%	35%
Occupancy	25%	65%	10%
Clerical and administration	50%	5%	45%

The activity based review has also revealed that the degree of fragility of the products drives the amount of time required for Receipt and Inspections, that the demands on Warehousing are driven by the average floor space required per unit of product held for the customer category and that the time taken for Packing reflects the complexity of customers' packaging specifications. The requirements per cubic metre of product for each customer type have been assessed to be as follows:

	Robust	Standard	Delicate
Receipt and Inspection (minutes)	4	8	16
Floor space (square metres)	0.5	1	0.6
Packing (minutes)	20	40	60

• Requirement _

(a) Calculate the budgeted average cost per cubic metre of product stored and packaged for each of the

three customer categories, without using the Activity Based information provided.

(b) Using the Activity Based information provided, calculate the budgeted average cost per cubic metre of product stored and packaged for each of the three customer categories. You may round your

calculations to two decimal places.

(c) Suggest how activity based costing may improve product costing and control within Packit Ltd.