Chapter IE, Problem 7E

1.

To determine

Introduction: Manufacturing overhead costs are not directly affected by the one single activity base, so to get an accurate allocation, ABC comes into the picture. This method identifies major activities that cause overhead costs to be incurred. Costs are broken down into activities and each activity is going to have its own cost space making it more accurate. So, this allocates a portion of the manufacturing overhead to each activity using individual activity rates.

The computation of the activity rate for each cost pool and allocate each cost pool to the company’s commercial market, home market, and school market.

2.

To determine

Introduction: Contribution format income statements are prepared for management use. Costs are classified by nature, whether variable or fixed costs.

Segment income statements are used by managers to make decisions. Managers are focused on different activities costs and revenue data in order to make sound decisions based on statements.

To prepare: To prepare a contribution format segmented income statement.

3.

To determine

Introduction: The company uses segmented income statements to evaluate which market earned the most profit and incurred the highest cost for the company. Companies use the segment margin percentage in determining whether to remove or modify a market. It helps management to focus on which market makes the most profit.

To draw: An insight into the segment income statement of the company’s market.