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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 AB estimation method. !ame is undertaken
below.
". The first step is to estimate the unit cost of ser#ices extended by the
company on its #alue adding processes.
Table 1
Sl.
No
Activity No. of
operations
Cost
Incurred
(USD)
Ref of
cost
iven in
colu!n"
#
Unit
Cost
(USD)
1 $ % # & '
A $andling of cartons
in %arehouse
&''''
cartons
(1)'''' *ara +,a- ."/
arton
B !hipping of cartons
by freight
0.'''
cartons
(.'''' *ara +,b- )/ carton
1esktop deli#ery "''' dly (('''' *ara +,c- ""'/ dly
1 !et up of manual
order
1)'''
orders
1)'''' *ara +,d-
,i-
1'/order
2 2nter indi#idual
lines of each order
1.'''' lines )''''' *ara +,d-
,ii-
(/line
3 4alidate 21I orders &''' orders ('''' *ara +,d-
,iii-
. / order
5 5eneral 6 !elling
2xpense
7!1
(".''''' of
Annual
!ales
"''''' *ara +,e- '.(08 of
sales
+. 2xplanation of working out the cost shown in column . of table abo#e is
gi#en below.
,a- $andling of cartons in warehouse9:This has two components. ost
of personnel used in warehouse operations and cost of warehouse
excluding personnel expense.
,i- ost of %arehouse excluding personnel is 7!1 "''''''
,ii- ;nly <'8 of warehouse personnel are used for handling of
cartons in warehouse. !o personnel expense towards the
same is '.< = 7!1 "(''''' > 7!1 "1)''''.
,iii- Total expense is 7!1
"''''''?7!1"1)''''>7!1(1)''''.
,b- ost of freight for shipping cartons is gi#en as 7!1 (.'''' in
exhibit ".
,c- 1esktop deli#ery9:This also has two constituents. ost of labour
used to dri#e the trucks and expense incurred on running of trucks.
,i- 1'8 of warehouse labour is used for desktop deli#ery. !o
the cost of labour for desktop deli#ery is
'.1=7!1"('''''>7!1"(''''.
,ii- 1eli#ery truck expense as gi#en in exhibit 1 is 7!1"'''''.
,iii- Total cost for desktop deli#ery is 7!1 "('''' ? 7!1"'''''
> 7!1((''''.
,d- 1ata 2ntry osts9:Total cost of data entry is 7!1&'''''. The entire
data entry operation has taken 1'''' hours in the year, amounting
to 7!1&' per hour. The acti#ities comprising of data entry are as
gi#en below.
Table $
Sl.
No
Activity Usae
(ours
Cost incurred
) USD*+ per
(our (USD)
,i- !et up of manual orders "''' 1)''''
,ii- 2nter indi#idual order lines 0.'' )'''''
,iii- 4alidate 21I @ Internet
orders
.'' (''''
,e- 5eneral 6 selling 2xpense is gi#en in exhibit 1 as 7!1"''''''.
(. The next step is to calculate the cost incurred by customer A and B
using the unit cost deri#ed in table91.!ame is shown in table + below.
Table %
Sl.
N
o
Services Availed Custo!er A Custo!er ,
-ty Cost
(USD)
-ty Cost
(USD)
,a- $andling of cartons in
warehouse A 7!1 ." per
carton
"''
cartons
1'('' "'' 1'(''
,b- !hipping by commercial
freight A 7!1) per carton
"'' 1"'' Bil Bil
,c- 1esktop deli#ery ser#ice A
7!1""' per deli#ery
Bil Bil ". dly ..''
,d- !et up of manual orders
A7!11' per order
) orders )' 1''
orders
1'''
,e- 2ntry of lines in manual
order A 7!1( per line
)' lines "(' 1&' lines 0"'
,f- 4alidation of 21I orders A
7!1. per order
) orders +' Bil Bil
,g- 5eneral 6 !elling expense
A '.(08 of annual sales
!ales
worth
7!1
1'+'''
(&( !ales
worth
7!1
1'('''
(&<
,h- redit charges A 1'8 per
annum on recei#ables
7!1
<''' for
1month
0. 7!1
+'''' for
+ months
0.'
,C- Total ost 7!1 1"(&< 7!1 1&&.<
.. 3rom table + it can be seen that though cost estimate of 7!1 1"0.' for
customer A as per the existing practice in the company is more or less fair, that of
customer B is grossly underestimated. !uch instances with more customers are
the reason for the company to post a loss in the year. The existing estimation of
cost needs to be done away with and AB 2stimation with unit costs of each
acti#ity worked out in table 1 is to be adopted for realistic estimate of cost
incurred by the company on each customer as per the ser#ices a#ailed.

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