Allocating selling and administrative expenses using activity-based costing

Shrute Inc. manufactures office copiers, which are sold to retailers. The price and cost of goods sold for each copier are as follows:

Line Item Description	Amount
Price	$700 per unit
Cost of goods sold	(420)
Gross profit	$280 per unit

In addition, the company incurs selling and administrative expenses of $222,490. The company wishes to assign these costs to its three major retail customers, The Warehouse, Kosmo Co., and Supply Universe. These expenses are related to its three major nonmanufacturing activities: customer service, sales order processing, and advertising support. The advertising support is in the form of advertisements that are placed by Shrute Inc. to support the retailer's sale of Shrute copiers to consumers. The budgeted activity costs and activity bases associated with these activities are:

Activity	Budgeted Activity Cost	Activity Base
Customer service	$44,950	Number of service requests
Sales order processing	25,740	Number of sales orders
Advertising support	151,800	Number of ads placed
Total activity cost	$222,490

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

Line Item Description	The Warehouse	Kosmo Co.	Supply Universe	Total
Number of service requests	70	10	230	310
Number of sales orders	220	90	470	780
Number of ads placed	20	10	80	110
Unit volume	660	660	660	1,980

Required:

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

Activity	Activity Rate
Customer Service	fill in the blank 1 of 3$ per serv. req.
Sales Order Processing	fill in the blank 2 of 3$ per sls. order
Advertising Support	fill in the blank 3 of 3$ per ad

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

Activity	Activity Costs
The Warehouse	fill in the blank 1 of 3$
Kosmo Co.	fill in the blank 2 of 3$
Supply Universe	fill in the blank 3 of 3$

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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.

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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.

Description	The Warehouse	Kosmo Co.	Supply Universe
Revenues	$Revenues	$Revenues	$Revenues
Cost of goods sold	Cost of goods sold	Cost of goods sold	Cost of goods sold
Gross profit	$Gross profit	$Gross profit	$Gross profit
Selling and administrative activities:
Customer service	$Customer service	$Customer service	$Customer service
Sales order processing	Sales order processing	Sales order processing	Sales order processing
Advertising support	Advertising support	Advertising support	Advertising support
Total selling and administrative activities	$Total selling and administrative activities	Total selling and administrative activities	Total selling and administrative activities
Operating income	$Operating income	$Operating income	$Operating income