ABC profitability analysis A company sells and services photocopying machines. Its sales department sells the machines and consumables, including ink and paper, and its service department provides an after sales service to its customers. The after sales service includes planned maintenance of the machine and repairs in the event of a machine breakdown. Service department customers are charged an amount per copy that differs depending on the size of the machine.

The company’s existing costing system uses a single overhead rate, based on total sales revenue from copy charges, to charge the cost of the Service Department’s support activities to each size of machine. The Service Manager has suggested that the copy charge should more accurately reflect the costs involved.

The company’s accountant has decided to implement an activity-based costing system and has obtained the following information about the support activities of the service department:

The following data have also been collected for each machine size:

Each customer has a service contract for two machines on average.
Required:

(a) Calculate the annual profit per machine for each of the three sizes of machine, using the current basis for charging the costs of support activities to machines.
(4 marks)

(b) Calculate the annual profit per machine for each of the three sizes of machine using activity-based costing.
(14 marks)

(c) Explain the potential benefits to the company of using an activity-based costing system.
(7 marks)
CIMA P1 Performance Operations

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Overheads per annum ($000) Activity Customer account handling Planned maintenance scheduling Unplanned maintenance scheduling Spare part procurement Other overheads Total overheads Cost driver Number of customers 126 Number of planned maintenance 480 visits Number of unplanned maintenance 147 visits Number of purchase orders 243 Number of machines 600 1596