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Concept explainers
Activity-based costing for a service company
Wells Fargo insurance Services (WFIS) is an insurance brokerage company that classified insurance products as either “easy” or “difficult.” Easy and difficult products were defined as follows:
Easy: Electronic claims, few inquiries, mature product
Difficult: Paper claims, complex claims to process, many inquiries, a new product with complex options
The company originally allocated processing and service expenses on the basis of revenue. Under this traditional allocation approach, the product profitability report revealed the following:
Easy Product | Difficult Product | Total | |
Revenue | $600 | $400 | $1,000 |
Processing and service expenses | 420 | 280 | 700 |
Income from operations | $180 | $120 | $ 300 |
Operating income margin | 30% | 30% | 30% |
WFIS decided to use activity-based costing to allocate the processing and service expenses. The following activity-based costing analysis of the same data illustrates a much different profit picture for the two types of products:
Easy Product | Difficult Product | Total | |
Revenue | $600 | $400 | $1,000 |
Processing and service expenses | 183 | 517 | 700 |
Income from operations | $417 | $(117) | $ 300 |
Operating income margin | 70% | (29%) | 30% |
Explain why the activity-based profitability report reveals different information from the traditional sales allocation report.
Source: Dan Patras and Kevin Clancy, “ABC in the Service Industry: Product Line Profitability at Acordia, Inc.” As Easy as ABC Newsletter, issue 12. Spring 1993
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Chapter 26 Solutions
Bundle: Financial & Managerial Accounting, 13th + Working Papers, Volume 1, Chapters 1-15 For Warren/reeve/duchac’s Corporate Financial Accounting, ... 13th + Cengagenow™v2, 2 Terms Access Code
- From the choices presented in parentheses, choose the appropriate term for completing each of the following sentences: a. A product, sales territory, department, or activity to which costs are traced is called a (direct cost, cost object). b. Advertising costs are usually viewed as (period, product) costs. c. Factory overhead costs combined with direct labor costs are called (prime, conversion) costs. d. Feedback is often used to (improve, direct) operations. e. A sacrifice made to obtain some benefit is a (cost, expense). f. The balance sheet of a manufacturer would include an account for (cost of goods sold, work in process inventory). g. The implementation of automatic, robotic factory equipment normally (increases, decreases) the direct labor component of product costs.arrow_forwardActivity Based Costing Give your answers to the following questions; Why do product costing systems based on a single, volume based cost driver tend to overcost high volume products? What undesirable strategic effects can such distortion of product costs have? What is meant by activity analysis? Give 3 criteria for determining whether an activity adds value. What is meant by customer profitability analysis as it relates to activity based costing? Give an example of an activity that might be performed more commonly for one customer than another.arrow_forwardEmployee training is an example of discretionary fixed costs. Select one: True False Below are the measures of cost functions except: a. Regression analysis b. Engineering analysis c. Visual fit analysis d. Maintenance analysis Cost behavior is linear in nature on cost driver levels. Select one: True False Discretionary cost are the fixed cost that are able to achieve at desired level of service or production. Select one: True False Period costs are the cost identified with goods produced. Select one: True False Lease payment is the example of discretionary fixed cost. Select one: True False Below are the examples of committed costs, except: a. Mortgage payment b. Depreciation c. Tax payment d. Management salary Direct labor cost includes wages of all the labors that can be traced specifically. Select one: True False Cost are assumed to be fixed or changes within the relevant range of activity. Select one: True Falsearrow_forward
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- Required information Skip to question [The following information applies to the questions displayed below.] Zenon Computer competes at the retail level on the basis of customer service. It has invested significant resources in its customer service department. Recently, the company has installed a traditional activity-based costing (ABC) system to provide better cost information for pricing, decision making, and customer profitability analysis. Most of the costs of running the customer service department are considered committed (i.e., short-term fixed) costs (principally, personnel and equipment costs). The budgeted cost for the upcoming period is $832,000. Activity analysis, recently conducted when the ABC system was implemented, revealed the following information: Activities Percentage of Employee Time Estimated (Budgeted) Cost Driver Quantity Handling customer orders 75% 8,320 customer orders Processing customer complaints 10 416 customer complaints Conducting customer credit checks…arrow_forwardActivity-Based Costing and Customer Profitability Schneider Electric manufactures power distribution equipment for commercial customers, such as hospitals and manufacturers. Activity-based costing was used to determine customer profitability. Customer service activities were assigned to individual customers, using the following assumed customer service activities, activity base, and activity rate: Customer Service Activity Activity Base Activity Rate Bid preparation Number of bid requests $400 per request Shipment Number of shipments $ 80 per shipment Support standard items Number of standard items ordered $ 25 per std. item Support nonstandard items Number of nonstandard items ordered $150 per nonstd. item Assume that the company had the following gross profit information for three representative customers: Customer 1 Customer 2 Customer 3 Revenues $120,000 $200,000 $160,000 Cost of goods sold 76,800 110,000 83,200 Gross profit…arrow_forwardActivity-Based Costing and Customer Profitability Schneider Electric manufactures power distribution equipment for commercial customers, such as hospitals and manufacturers. Activity-based costing was used to determine customer profitability. Customer service activities were assigned to individual customers, using the following assumed customer service activities, activity base, and activity rate: Customer Service Activity Activity Base Activity Rate Bid preparation Number of bid requests $400 per request Shipment Number of shipments $ 80 per shipment Support standard items Number of standard items ordered $ 25 per std. item Support nonstandard items Number of nonstandard items ordered $150 per nonstd. item Assume that the company had the following gross profit information for three representative customers: Customer 1 Customer 2 Customer 3 Revenues $120,000 $200,000 $160,000 Cost of goods sold 76,800 110,000 83,200 Gross profit…arrow_forward
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- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,
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