Managing Cash Flow

Activity Based Costing Principles 169
Cost Data:
• Average cost of PO process activities = $130 (labor and materials)
• POs processed in period: 240 X $130 = $31,200 total cost
• By product item: Item #123 = 82 PO’s X $130 = $10,660
Costing by Product: Purchase Order Processing
Product # of POs %
1 183 6.6%
2 346 12.5%
3 639 23.1%
4 621 22.4%
5 468 16.9%
6 ______ 512 ________ 18.5%
TOTAL ______ 2,769 ________ 100.0%
Total cost for Purchasing Department for period = $ 88,766.
Assigning functional costs to products:
Product % Cost
1 6.6% $ 5,859
2 12.5% 11,096
3 23.1% 20,505
4 22.4% 19,883
5 16.9% 15,001
6 _______ 18.5% _________ 16,422
TOTAL 100.0% $88,766
Exhibit 5.18
Using Functional Costs to Assign Costs to Products
overseas market), market share has dropped to 32 percent over the past few years.
Although its product is still perceived to be the best quality in the market place,
ACE’s four competitors have been able to basically copy the product and sell it
from 10 to 30 percent less than ACE, as shown below:
Selling % of Market
Company Price ACE S.P. Share
ACE, Inc. $129 100% 32%
1 $ 89 69% 36%
2 $ 98 76% 17%
3 $109 84% 8%
4 $116 90% 7%
As can be seen, this has become a price-sensitive product, with the greatest
sales going to the lowest-price seller. Some customers of ACE are still willing to