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:

Line Item DescriptionAmountPrice$60,000 per unitCost 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:

ActivityBudgeted Activity CostActivity BaseCustomer service$31,500Number of service requestsProject bidding74,000Number of bidsEngineering support120,750Number of customer design changes Total activity cost$226,250

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

Line Item DescriptionGough IndustriesBreen Inc.The Martin GroupTotalNumber of service requests3628116180Number of bids504095185Number of customer design changes1835108161Unit volume3016450

Required:

Question Content Area

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

ActivityActivity RateCustomer Servicefill in the blank 1 of 3$ per serv. req.Project Biddingfill in the blank 2 of 3$ per bidEngineering Supportfill in the blank 3 of 3$ per design changes

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

ActivityActivity CostsGough Industriesfill in the blank 1 of 3$Breen Inc.fill in the blank 2 of 3$The Martin Groupfill in the blank 3 of 3$

Question Content Area

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.

DescriptionGough Industries Breen Inc.The Martin GroupRevenues$Revenues$Revenues$RevenuesCost of goods soldCost of goods soldCost of goods soldCost of goods soldGross profit$Gross profit$Gross profit$Gross profitSelling and administrative activities: Customer service$Customer service$Customer service$Customer serviceProject biddingProject biddingProject biddingProject biddingEngineering supportEngineering supportEngineering supportEngineering supportTotal selling and administrative activities$Total selling and administrative activities$Total selling and administrative activities$Total selling and administrative activitiesOperating income (loss)$Operating income (loss)$Operating income (loss)$Operating income (loss) Activity Rate Customer Service Project Bidding Engineering Support per serv, req. per bid 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 Arctic Air Inc. Customer Profitability Report For the Year Ended December 31 Description 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)