Kramer Corporation is an office supplier dealing in a number of different products. It currently allocates its ordering and delivery costs to its residential and business customer groups on the basis of order value. However, the company has recently decided to implement activity-based costing starting in 20X4 to assign these costs to customers. Key data for 20X3 are as follows:

Kramer has 3,000 residential customers and 750 business customers.

Required:

1. Compute the cost per customer for residential and business customers for 20X3, using the current system of cost allocation.

2. Assume that the 20X3 data will hold for 20X4. Compute the cost per customer for residential and business customers for 20X4 using the proposed system of cost allocation. In doing so, calculate the overhead allocation rate for each activity, and use these rates to assign costs to the two customer groups.?

3. Explain the difference between the two cost allocation systems.

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Total Activity Activity Activity Volume Volume Activity Activity Base Activity Cost Residential Business Volume Sales (order value) $3,600,000 $3,000,000 $6,600,000 $ 960,000 Order processing No. of orders 6,000 2,000 8,000 2,000 4,000 Generating sales 750,000 No. of sales calls 6,000 Sales follow-up 810,000 No. of follow-ups 100 400 500 Processing change orders No. of change 60,000 orders 200 200 400 Delivery 1.250,000 No. of deliveries 6,000 4,000 10,000 Total $3,830,000