Allocating Selling and Administrative Expenses using Activity-Based Costing

Arctic Air Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows:

Price	$60,000	per unit
Cost of goods sold	(28,000)
Gross profit	$32,000	per unit

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
Customer service			$31,500			Number of service requests
Project bidding			74,000			Number of bids
Engineering support			120,750			Number of customer design changes
	Total activity cost		$226,250

Activity-base usage and unit volume information for the three customers is as follows:

	Gough Industries			Breen Inc.		The Martin Group		Total
Number of service requests	36			28		116		180
Number of bids	50			40		95		185
Number of customer design changes	18			35		108		161
Unit volume	30			16		4		50

Required:

1. Determine the activity rates for each of the three nonmanufacturing activity pools. Round to the nearest whole dollar.

	Activity Rate
Customer Service	$ per serv. req.
Project Bidding	$ per bid
Engineering Support	$ per design changes

2. Determine the activity costs allocated to the three customers, using the activity rates in (1).

	Activity Costs
Gough Industries	$
Breen Inc.	$
The Martin Group	$

Feedback

1. Calculate for each activity:

Budgeted Activity Cost Total Activity-Base Usage = Activity Rate

2. Calculate for each customer:

Activity-Base Usage x Activity Rate from Req. (1) = Activity Cost; Sum all activity costs per customer to determine total nonmanufacturing activity costs.

3. Construct customer profitability reports for the three customers, dated for the year ended December 31, using the activity costs in (2). The reports should disclose the gross profit and operating income associated with each customer.

Arctic Air Inc.
Customer Profitability Report
For the Year Ended December 31
	Gough Industries	Breen Inc.	The Martin Group
Revenues	$	$	$
Cost of goods sold
Gross profit	$	$	$
Selling and administrative activities:
Customer service	$	$	$
Project bidding
Engineering support
Total selling and administrative activities	$	$	$
Operating income (loss)	$	$	$

Feedback

3. Set up a customer profitability report for each customer as: Revenues - Cost of Goods Sold = Gross Profit; Gross Profit - Activity Expenses = Operating Income

Revenues = Price per Unit x Unit Volume

Cost of Goods Sold = Cost of Goods Sold per Unit x Unit Volume