Betsy Rose owns a small department store in a metropolitan area. For twenty years, the accountant has applied overhead to the various departments-Women's Apparel, Men's Apparel, Cosmetics, Housewares, Shoes, and Electronics-based on the basis of employee hours worked. Betsy Rose's daughter, who is an accounting student at a local university, has suggested her mother should consider using activity-based costing (ABC). In an attempt to implement ABC, Betsy Rose and her daughter have identified the following activities.

Required:

Determine a cost driver for each of the activities listed below.

a. Placing orders

b. Stocking merchandise

c. Waiting on customers

d. Janitorial and Maintenance

Activity Cost Driver

a. Placing orders Number of Orders

b. Stocking merchandise Number of Orders

c. Waiting on customers Number of Customers

d. Janitorial and Maintenance Area / Square feet occupied

Explanation:

Betsy Rose

(ABC). Activity Based Costing

Activity Cost Driver

a. Placing orders Number of Orders

b. Stocking merchandise Number of Orders

c. Waiting on customers Number of Customers

d. Janitorial and Maintenance Area / Square feet occupied

In selecting a cost driver for an activity it must be kept in mind that the activity must be

1) directly linked with the cost driver

2) it should not have indirect expenses

3) should be specific for that activity.

For example the number of orders would not affect Janitorial and Maintenance services but the number of orders would affect placing orders or stocking merchandise.