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Arctic Air Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows: Category Per Unit Dollar Amount Price S60,000 Cost of goods sold Gross profit 28,000 32,000 In addition, the company incurs selling and administrative expenses of $226,250. The company wishes 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 service, project bidding, and engineering support. The engineering support is in the form of engineering 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 $51,500 Number of service requests 64,000 Number of bids Customer service Project bidding Engineering support 110,500 Number of customer design changes Total costs 226,000 Activity-base usage and unit volume information for the three customers is as follows: Activity Number of service requests Number of bids Number of customer design changes Gough Industries Breen Inc. The Martin Group Total 27 35 115 177 50 40 95 185 18 35 108 161 Unit volume 30 16 4 50 Instructions a. Determine the activity rates for each of the three nonmanufacturing activity pools. b. Determine the activity costs allocated to the three customers, using the activity rates in (a).

Arctic Air Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows: Category Per Unit Dollar Amount Price S60,000 Cost of goods sold Gross profit 28,000 32,000 In addition, the company incurs selling and administrative expenses of $226,250. The company wishes 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 service, project bidding, and engineering support. The engineering support is in the form of engineering 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 $51,500 Number of service requests 64,000 Number of bids Customer service Project bidding Engineering support 110,500 Number of customer design changes Total costs 226,000 Activity-base usage and unit volume information for the three customers is as follows: Activity Number of service requests Number of bids Number of customer design changes Gough Industries Breen Inc. The Martin Group Total 27 35 115 177 50 40 95 185 18 35 108 161 Unit volume 30 16 4 50 Instructions a. Determine the activity rates for each of the three nonmanufacturing activity pools. b. Determine the activity costs allocated to the three customers, using the activity rates in (a).

Managerial Accounting: The Cornerstone of Business Decision-Making
Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Chapter5: Activity-based Costing And Management
Section: Chapter Questions
Problem 59P: Activity-Based Supplier Costing Levy Inc. manufactures tractors for agricultural usage. Levy...
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Arctic Air Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows: Category Per Unit Dollar Amount S60,000 28,000 Price Cost of goods sold Gross profit 32,000 In addition, the company incurs selling and administrative expenses of $226,250. The company wishes 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 service, project bidding, and engineering support. The engineering support is in the form of engineering 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 Customer service Budgeted Activity Cost Activity Base $51,500 Number of service requests Project bidding Engineering support 64,000 Number of bids 110,500 Number of customer design changes Total costs 226,000 Activity-base usage and unit volume information for the three customers is as follows: Activity Gough Industries Breen Inc. The Martin Group Total Number of service requests Number of bids Number of customer design changes 35 27 115 177 50 40 95 185 18 35 108 161 Unit volume 30 16 4 50 Instructions a. Determine the activity rates for each of the three nonmanufacturing activity pools. b. Determine the activity costs allocated to the three customers, using the activity rates in (a). c. Construct customer profitability reports for the three customers, dated for the year ended December 31, using the activity costs in (b). The reports should disclose the gross profit and income from operations associated with each customer. d. Provide recommendations to management on how operations can be improved based on the profitability reports in (c).
Transcribed Image Text:Arctic Air Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows: Category Per Unit Dollar Amount S60,000 28,000 Price Cost of goods sold Gross profit 32,000 In addition, the company incurs selling and administrative expenses of $226,250. The company wishes 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 service, project bidding, and engineering support. The engineering support is in the form of engineering 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 Customer service Budgeted Activity Cost Activity Base $51,500 Number of service requests Project bidding Engineering support 64,000 Number of bids 110,500 Number of customer design changes Total costs 226,000 Activity-base usage and unit volume information for the three customers is as follows: Activity Gough Industries Breen Inc. The Martin Group Total Number of service requests Number of bids Number of customer design changes 35 27 115 177 50 40 95 185 18 35 108 161 Unit volume 30 16 4 50 Instructions a. Determine the activity rates for each of the three nonmanufacturing activity pools. b. Determine the activity costs allocated to the three customers, using the activity rates in (a). c. Construct customer profitability reports for the three customers, dated for the year ended December 31, using the activity costs in (b). The reports should disclose the gross profit and income from operations associated with each customer. d. Provide recommendations to management on how operations can be improved based on the profitability reports in (c).
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Activity Based Costing

Activity-based costing is the process of costing the products or services where the overheads are allocated between the products or services based on each activity used by such product or service. 

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