PR 4-5A Allocating selling and administrative expenses usingactivity-based costingObj. 5Arctic Air Inc. manufactures cooling units for commercial buildings. The price and cost of goodssold for each unit are as follows:$ 60,000 per unit(28,000)$ 32,000 per unitPriceCost of goods soldGross profitIn addition, the company incurs selling and administrative expenses of $226,250. The companywishes to assign these costs to its three major customers, Gough Industries, Breen Inc., and TheMartin Group. These expenses are related to three major nonmanufacturing activities: customerservice, project bidding, and engineering support. The engineering support is in the form of engi-neering changes that are placed by the customer to change the design of a product. The budgetedactivity costs and activity bases associated with these activities are:ActivityBudgeted Activity CostActivity Base$ 31,50074,000120,750Customer serviceNumber of service requestsProject biddingEngineering supportNumber of bidsNumber of customer design changesTotal costs$226,250Activity-base usage and unit volume information for the three customers is as follows:The MartinGough IndustriesBreen Inc.GroupTotalNumber of service requests3628116180Number of bids504095185Number of customer design changes1835108161Unit volume3016450Instructions1. Determine the activity rates for each of the three nonmanufacturing activity pools.2. Determine the activity costs allocated to the three customers, using the activity rates in (1).3. Construct customer profitability reports for the three customers, dated for the year endedDecember 31, using the activity costs in (2). The reports should disclose the gross profit andoperating income associated with each customer.Provide recommendations to management, based on the profitability reports in (3).

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activity-based costing Arctic Air Inc. manufactures cooling units for commercial buildings. The price and cost of goods old for each unit are as follows: $ 60,000 per unit (28,000) $ 32,000 per unit Price Cost of goods sold Gross profit n addition, the company incurs selling and administrative expenses of $226,250. The company vishes to assign these costs to its three major customers, Gough Industries, Breen Inc., and The Martin Group. These expenses are related to three major nonmanufacturing activities: customer ervice, project bidding, and engineering support. The engineering support is in the form of engi- neering changes that are placed by the customer to change the design of a product. The budgeted activity costs and activity bases associated with these activities are: Activity Budgeted Activity Cost Activity Base

activity-based costing Arctic Air Inc. manufactures cooling units for commercial buildings. The price and cost of goods old for each unit are as follows: $ 60,000 per unit (28,000) $ 32,000 per unit Price Cost of goods sold Gross profit n addition, the company incurs selling and administrative expenses of $226,250. The company vishes to assign these costs to its three major customers, Gough Industries, Breen Inc., and The Martin Group. These expenses are related to three major nonmanufacturing activities: customer ervice, project bidding, and engineering support. The engineering support is in the form of engi- neering changes that are placed by the customer to change the design of a product. The budgeted activity costs and activity bases associated with these activities are: Activity Budgeted Activity Cost Activity Base

Financial & Managerial Accounting

14th Edition

ISBN:9781337119207

Author:Carl Warren, James M. Reeve, Jonathan Duchac

Publisher:Carl Warren, James M. Reeve, Jonathan Duchac

Chapter18: Activity-Based Costing

Section: Chapter Questions

Problem 18.3TIF: Communication The controller of New Wave Sounds Inc. prepared the following product profitability...

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Construct and interpret a product profitability report, allocating selling and administrative expenses Naper Inc. manufactures power equipment. Naper has two primary productsgenerators and air compressors. The following report was prepared by the controller for Napers senior marketing management for the year ended December 31: Generators Air Compressors Total Revenue 4,200,000 3,000,000 7,200,000 Cost of goods sold 2,940,000 2,100,000 5,040,000 Gross profit 1,260,000 900,000 2,160,000 Selling and administrative expenses 610,000 Income from operations 1,550,000 The marketing management team was concerned that the selling and administrative expenses were not traced to the products. Marketing management believed that some products consumed larger amounts of selling and administrative expense than did other products. To verify this, the controller was asked to prepare a complete product profitability report, using activity-based costing. The controller determined that selling and administrative expenses consisted of two activities: sales order processing and post-sale customer service. The controller was able to determine the activity base and activity rate for each activity, as follows: Activity Activity Base Activity Rate Sales order processing Sales orders 65 per sales order Post-sale customer service Service requests 200 per customer service request The controller determined the following activity-base usage information about each product: Generators Air Compressors Number of sales orders 3,000 4,000 Number of service requests 225 550 A. Determine the activity cost of each product for sales order processing and post-sale customer service activities. B. Use the information in (A) to prepare a complete product profitability report dated for the year ended December 31. Compute the gross profit to sales and the income from operations to sales percentages for each product. (Round to two decimal places.) C. Interpret the product profitability report. How should management respond to the report?
Communication The controller of New Wave Sounds Inc. prepared the following product profitability report for management, using activity-based costing methods for allocating both the factory overhead and the marketing expenses. As such, the controller has confidence in the accuracy of this report. Home Theater Speakers Wireless Speakers Wireless Headphones Total Sales 1,500,000 1,200,000 900,000 3,600,000 Cost of goods sold 1,050,000 720,000 810,000 2,580,000 Gross profit 450,000 480,000 90,000 1,020,000 Marketing expenses 600,000 120,000 72,000 792,000 Income from operations (150,000) 360,000 18,000 228,000 In addition, the controller interviewed the vice president of marketing, who provided the following insight into the company's three products: The home theater speakers are an older product that is highly recognized in the marketplace. The wireless speakers are a new product that was just recently bunched. The wireless headphones are a new technology that has no competition in the marketplace, and it is hoped that they will become an important future addition to the companys product portfolio. Initial indications are that the product is well received by customers. The controller believes that the manufacturing costs for all three products are in line with expectations. Based on the information provided: 1. Calculate the ratio of gross profit to sales and the ratio of income from operations to sales for each product. 2. Write a brief (one page) memo using the product profitability report and the calculations in (1) to make recommendations to management with respect to strategies for the three products.
Classifying costs The following is a manufacturing cost report of Marching Ants Inc. Evaluate and correct this report. Marching Ants Inc. Manufacturing Costs For the Quarter Ended June 30 Materials used in production (including 56,200 of indirect materials) 607,500 Direct labor (including 84,400 maintenance salaries) 62,500 Factory overhead: Supervisor salariesplant 517,500 Heat, light, and power-plant 140,650 Sales salaries 348,750 Promotional expenses 315,000 Insurance and property taxesplant 151,900 Insurance and property taxescorporate offices 219,400 Depreciationplant and equipment 123,750 Depreciationcorporate offices 90,000 3,076,950
2-30 Cost of Goods Manufactured Morning Smiles Coffee Company manufactures Stoneware French Press coffee makers. During the month of March, the company purchased 350,000 of materials. Also during the month of March, Morning Smiles incurred direct labor cost of 74,000 and manufacturing overhead of 190,000. Inventory information is as follows: Required: 1. Calculate the cost of goods manufactured for the month of March. 2. Calculate the cost of one coffee maker assuming that 8,100 coffee makers were completed during March.
Activity-based costing for a service company Safely First Insurance Company tarries three major lines of insurance: auto, workers compensation, and homeowners. The company has prepared the following report: Safety First Insurance Company Product Profitability Report For the Year Ended December 31 Auto Workers Compensation Homeowners Premium revenue 5,750,000 6,240,000 8,160,000 Estimated claims 4,312,500 4,680,000 6,120,000 Underwriting income 1,437,500 1,560,000 2,040,000 Underwriting income as a percent of premium revenue 25% 25% 25% Management is concerned that the administrative expenses may make some of the insurance lines unprofitable. However, the administrative expenses have not been allocated to the insurance lines. The controller has suggested that the administrative expenses could he assigned to the insurance lines using activity-based costing. The administrative expenses are comprised of five activities. The activities and their rates are as follows: Activity Activity Rates New policy processing 120 per new policy Cancellation processing 175 per cancellation Claim audits 320 per claim audit Claim disbursements processing 104 per disbursement Premium collection processing 24 per premium collected Activity-base usage data for each line of insurance were retrieved from the corporate records as follows: Auto Workers Compensation Homeowners Number of new policies 1,320 1,500 4,080 Number of canceled policies 480 240 2,160 Number of audited claims 385 120 960 Number of claim disbursements 480 216 840 Number of premiums collected 8,400 1,800 15,000 A. Complete the product profitability report through the administrative activities. Determine the income from operations as a percent of premium revenue, rounded to the nearest whole percent. B. Interpret the report.
Production run size and activity improvement Littlejohn, Inc. manufactures machined parts for the automotive industry. The activity cost associated with Part XX-10 is as follows: Activity Activity-Base Usage Activity Rate = Activity Cost Fabrication 250 dlh 80per dlh 20,000 Setup 10 setups 80 per setup 800 Production control 10 prod, runs 30 per prod, run 300 Moving 10 moves 25 per move 250 Total activity cost per unit 21,350 Estimated units of production 500 Activity cost per unit 42.70 Each unit requires 30 minutes of fabrication direct labor. Moreover, part XX-10 is manufactured in production run sizes of 50 units. Each production run is set up, scheduled (production control), and moved as a batch of 50 units. Management is considering improvements in the setup, production control, and moving activities in order to cut the production run sizes by half. As a result, the number of setups, production runs, and mows will double from 10 to 20. Such improvements are expected to speed the companys ability to respond to customer orders. Setup is reengineered so that it takes 60% of the original cost per setup. Production control software will allow production control effort and cost per production run to decline by 60%. Moving distance was reduced by 40%, thus reducing the cost per mow by the same amount. A. Determine the revised activity cost per unit under the proposed changes. B. Did these improvements reduce the activity cost per unit? C. What cost per unit for setup would be required for the solution in (A) to equal the base solution?
Problem 4Sales Price Php 300 per unitFixed Cost:Marketing and administrative Php 24,000.00 per periodManufacturing overhead Php 30,000.00 per periodVariable Cost:Marketing and administrative Php 6 per unitManufacturing overhead Php 9 per unitDirect Labor Php 30 per unitDirect Materials Php 60 per unitUnit Produced and sold Php 1,200 per periodRequired: 4. Full cost to make and sell per unit5. Compute Net income
Problem 3-11 (Algo) T-Account Analysis of Cost Flows [LO3-2, LO3-3, LO3-4] Selected T-accounts of Moore Company are given below for the just completed year: Raw Materials Bal. 1/1 35,000 Credits ? Debits 160,000 Bal. 12/31 45,000 Manufacturing Overhead Debits 188,400 Credits ? Work in Process Bal. 1/1 40,000 Credits 530,000 Direct materials 110,000 Direct labor 210,000 Overhead 218,400 Bal. 12/31 ? Factory Wages Payable Debits 225,000 Bal. 1/1 19,000 Credits 220,000 Bal. 12/31 14,000 Finished Goods Bal. 1/1 60,000 Credits ? Debits ? Bal. 12/31 90,000 Cost of Goods Sold Debits ? Required: 1. What was the cost of raw materials used in production during the year? 2. How much of the materials in (1) above consisted of indirect materials? 3. How much of the factory labor cost for the year consisted of indirect labor? 4. What was the cost of…
4-4 Product versus period costs (LO 1, 2)Carleton Closures, Inc., manufactures president of Carleton Closures, Inc., has gathered the following cost information from the company's accounting records for the latest month of operations. Advertising $25,000 Fire insurance premium for the factory building $6,250 Sales office utilities $2,500 Air filters for the buffing machines used to produce the clamps $1,875 Aluminum used to produce the clamps $37,500 Rent on the factory building $10,000 Freight to ship the clamps to customers $3,125 Sales department executives' salaries $42,500 Production supervisors' salaries $22,500 Assembly line workers' wages $60,000 Required a.Calculate the total period costs for the month. bCalculate the total product costs for the month. cCalculate the amount of manufacturing overhead incurred for the month.