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Case Title Dakota Office Products Price   $75
Solution ID 13571
Case ID 102021

Cost Drivers, Activity Cost, Cost Driver Rate

Services Provided to Customer A and Customer B

Customer A, Customer B

Total Number Of Each Cost Driver

Product Cost using ABC Costing


The inaccurate current pricing system of Dakota Office product has raised the need of a new product costing system, which will help the company to fairly differentiate between customers on the degree of their profitability. Activity based costing is used for this purpose, which divide the total overhead costs into different activity pools. Then, costs of these activities are allocated to the customers using the cost drivers. Special care has to be taken while determining the main activities performed in the firm and the cost drivers. The activities must consume all the available resources of the firm while the cost driver must allocate all the activity cost to customers or products. Activity based costing system is adopted while determining the accurate profitability of two different customers.

No of Words 1605
Questions Covered

1. Why was Dakota?s existing pricing system inadequate for its current operating environment?

2. Provide a brief analysis of the attached (page 2 of this document) activity-based costing system. Do you agree with the activities and/or cost drivers identified for each activity? Why or why not?

3. Using the activity-based costing system from Question 2, calculate the profitability of Customer A and Customer B. (Hint: This should be a relatively straightforward calculation given the ABC system in Question 2)

4. What explains any difference in profitability between the two customers? What are the limitations, if any, to the estimates of the profitability of the two customers?

5. Assume that Dakota applies the analysis done in Question 3 to its entire customer base. How could such information help the Dakota managers increase company profits?

Keywords Activity-based costing, Cost systems, Distribution, Management accounting, Pricing, Profitability
Status Available


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