FINANCIAL AND MANAGERIAL ACCOUNTING
13th Edition
ISBN: 9781337816045
Author: WARREN
Publisher: CENGAGE L
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Chapter 26, Problem 26.3CP
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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Alter's Home Center (AHC) sells renovation and remodeling products to both contractors and individual home owners. One of the
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Activity
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Number of orders
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Number of complaints
The intern selected two customers, who were frequent customers, to use as an illustration of the system: Wagner Remodeling and
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Chapter 26 Solutions
FINANCIAL AND MANAGERIAL ACCOUNTING
Ch. 26 - Why would management be concerned about the...Ch. 26 - Why would a manufacturing company with multiple...Ch. 26 - How do the multiple production department and the...Ch. 26 - Under what two conditions would the multiple...Ch. 26 - Prob. 5DQCh. 26 - Prob. 6DQCh. 26 - Prob. 7DQCh. 26 - Under what circumstances might the activity-based...Ch. 26 - Prob. 9DQCh. 26 - Prob. 10DQ
Ch. 26 - Single plantwide factory overhead rate The total...Ch. 26 - Single plantwide factory overhead rate The total...Ch. 26 - Multiple production department factory overhead...Ch. 26 - Multiple production department factory overhead...Ch. 26 - Activity based costing: factory overhead costs The...Ch. 26 - Activity-based costing: factory overhead costs The...Ch. 26 - Activity-based costing: selling and administrative...Ch. 26 - Activity-based costing: selling and administrative...Ch. 26 - Activity-based costing for a service business...Ch. 26 - Activity-based costing for a service business...Ch. 26 - Single plantwide factory overhead rate Nixon...Ch. 26 - Single plantwide factory overhead rate Matts Music...Ch. 26 - Single plantwide factory overhead rate Sally...Ch. 26 - Prob. 26.4EXCh. 26 - Multiple production department factory overhead...Ch. 26 - Single plantwide and multiple production...Ch. 26 - Single plantwide and multiple production...Ch. 26 - Identifying activity bases in an activity-based...Ch. 26 - Product costs using activity rates Nozama.com Inc....Ch. 26 - Prob. 26.10EXCh. 26 - Prob. 26.11EXCh. 26 - Activity cost pools, activity rates, and product...Ch. 26 - Activity-based costing and product cost distortion...Ch. 26 - Multiple production department factory overhead...Ch. 26 - Activity-based costing and product cost distortion...Ch. 26 - Single plantwide rate and activity-based costing...Ch. 26 - Evaluating selling and administrative cost...Ch. 26 - Prob. 26.18EXCh. 26 - Prob. 26.19EXCh. 26 - Activity-based costing for a service company...Ch. 26 - Activity-based costing for a service company...Ch. 26 - Single plantwide factory overhead rate Orange...Ch. 26 - Multiple production department factory overhead...Ch. 26 - Activity-based and department rate product costing...Ch. 26 - Prob. 26.4APRCh. 26 - Prob. 26.5APRCh. 26 - Product costing and decision analysis for a...Ch. 26 - Single plantwide factory overhead rate Spoiled Cow...Ch. 26 - Multiple production department factory overhead...Ch. 26 - Activity-based department rate product costing and...Ch. 26 - Activity-based product costing Sweet Sugar Company...Ch. 26 - Allocating selling and administrative expenses...Ch. 26 - Product costing and decision analysis for a...Ch. 26 - Prob. 26.1CPCh. 26 - Prob. 26.2CPCh. 26 - Activity-based costing for a service company Wells...Ch. 26 - Using a product profitability report to guide...Ch. 26 - Prob. 26.5CPCh. 26 - Prob. 26.6CP
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