Allied Office Products Case Solution

1. Using the information in the text and in Exhibit 2, calculate "ABC" based services costs for the TFC business.

Any company that manufactures and sells products has the leverage of operating any relevant and legally compliant costing systems for its inventory. In order to find out the exact or accurate costs of products, 'Allied office products' wants to evaluate their costing system for ABC costing system. ABC costing stands for ‘activity based costing’. The traditional costing methods allocate the product cost based on the number of labor hours and purchased raw materials etc. On the contrast, the activity based costing tends to establish a relationship between the overall costs and overhead rate by utilizing the information related to the number of activities consumed by products. This is a more accurate costing system as compared with the traditional ‘absorption costing’ where a single overhead rate is used.

In order to find out the ABC based service costs for TFC business, first you should list the relevant activities and determine the total cost exploited by them. The following table depicts the costs of value added services as calculated by Tim and John.

Table 1: Cost of Value added Activities

The next step in the chain of calculations is the determination of level of activities and the rate or cost associated with them. The following table depicts the relevant activities and their cost or rate.

Table 2: Other Activities

Now by capitalizing on this data, the ABC service costs for each value added activity can be calculated. Let’s start from storage charge.

Storage Charge

Based on the data pertaining to the storage cost and number of cartons, the storage charge or rate can be calculated as follows:

Table 3: Storage Charge

Requisition Handling Charge

Requisition costs when divided by the number of requisitions, will yield requisition handling charge.

Table 4: Requisition Handling Charge