CHAPTER 4
Activity-Based Costing
COLLABORATIVE LEARNING EXERCISE SOLUTION
1. Shipping and warehousing costs are currently assigned using tons of paper produced, a unit–
based measure. Many of these costs, however, are not driven by quantity produced. Many
products have special handling and shipping requirements involving extra costs. These costs
should not be assigned to those products that are shipped directly to customers.
2. The new method proposes assigning the costs of shipping and warehousing separately for
the low-volume products. To do so requires three cost assignments: receiving goods, ship-
ping goods, and carrying goods. The drivers for each activity are tons processed, items
shipped, and tons sold.
a. Pool rate, receiving costs:
b. Pool rate, shipping costs:
c. Pool rate, carrying cost (an opportunity cost):
Carrying cost per year (LLHC) = 3 $1,998 0.14
d. Shipping and warehousing cost per ton sold:
Receiving …………………………………… $ 39.29
3. Profit analysis:
Revised profit per ton (LLHC):
Selling price ………………………………………………….. $ 2,500.00
Less manufacturing cost …………………………………. 1,998.00
Gross profit ……………………………………………… $ 502.00
4. The decision to drop some high-volume products and emphasize low-volume products could
clearly be erroneous. As LLHC has demonstrated, its apparent high profitability is attributa-
ble to distorted cost assignments. A significant change in the image of LLHC was achieved
5. Emily’s strategy changed because her information concerning the individual products