?Does charging a uniform price to all customers really make sense?? This was the question that Lori Peters, founder and CEO of One Stop Shop (OSS), asked her management team. ?Charging a uniform price assumes that all customers are the same in terms of the resources they consume; this can?t possibly be true.? Ralph Goodwin, the chief operations officer, couldn?t agree more. Sarah Price, the accountant, jumped in to add that her new activity-based costing system accounts for the differences in the resources consumed by different customers. ?Our new costing system does not allocate costs based on the dollar value of orders; we now capture the number of transactions, by customer, of the four major activities involved in satisfying our customers.? While acknowledging the new system, Goodwin still did not believe that the new system actually captured the resources required to cater to the different customers? needs. ?The resources required to cater to each customer?s needs vary considerably, and the number of transactions is at best a somewhat poor proxy for this.? The meeting ended with Price agreeing to review her costing system.

Upon returning to her office, she went through the data for the previous year (20X4) and listed the following information pertaining to OSS?s four major customers (A, B, C, and D), who account for well over 85% of the company?s orders:

Upon further reflection, she decided to investigate the four activities to determine whether number of transactions is really a poor proxy, as Goodwin had commented. After completing her investigation, she prepared the following additional table, which captured the time consumed for each activity:

Required:

Sarah Price has approached you to help her prepare a response to the concerns raised by Peters and Goodwin. Analyze the costing system and report whether using different measures of activity volume will lead to differences in the costs allocated to the four customers. Explain the reasons for any differences. What will you recommend to senior management with respect to improving the costing system?

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Activity Amount Transactions $ 1,685,000 Order taking 28,720 (number of orders received) 36,810 (number of inspections) Inspection 1,740,000 452,500 (number of packages) Packaging 1,760,000 2.325,000 186,450 (number of shipments) Shipping $ 7,510,000 A D Number of orders received 9,560 7,400 5,200 6,560 Number of inspections 6,500 9,120 7,450 13,740 Number of packages 98,600 125,680 84,600 143,620 Number of shipments 51,000 40,900 56,350 38,200 B Hours C Hours Total Hours A Hours D Hours Order-taking time 130,800 110,460 99,790 421,250 80,200 Inspection time 88,290 123,870 101,200 186,640 500,000 Packaging time 95,460 185,460 125,420 143,660 550,000 Shipping time 206,100 162,940 226,700 750,000 154,260