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:

Price	$700	per unit
Cost of goods sold	420
Gross profit	$280	per unit

In addition, the company incurs selling and administrative expenses of $218,090. 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			$39,150		Number of service requests
Sales order processing			26,040		Number of sales orders
Advertising support			152,900		Number of ads placed
	Total activity cost		$218,090

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

	The Warehouse			Kosmo Co.		Supply Universe		Total
Number of service requests	60			10		200		270
Number of sales orders	260			110		560		930
Number of ads placed	20			10		80		110
Unit volume	610			610		610		1,830

Required:

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

	Activity Rate
Customer Service	$	per serv. req.
Sales Order Processing	$	per bid
Advertising Support	$	per customer design change

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

	Activity Costs
The Warehouse	$
Kosmo Co.	$
Supply Universe	$

Feedback

1. Calculate for each activity: Total cost Total activity base = Activity Rate

2. Calculate for each product: Activity usage x Activity rate from Req. (1) = Activity cost; Sum all activity costs per product to determine a total and divide the total overhead by budgeted units to derive the activity costs per unit for each product.

Learning Objective 5.

3. Construct customer profitability reports for the three customers, dated for the year ended December 31, 2016, using the activity costs in (2). The reports should disclose the gross profit and income from operations associated with each customer. Enter all amounts as positive numbers, except for a negative income from operations.

Shrute Inc.
Customer Profitability Report
For the Year Ended December 31
	The Warehouse	Kosmo Co.	Supply Universe
Revenues	$	$	$
Cost of goods sold
Gross profit	$	$	$
Selling and administrative activities:
Customer service	$	$	$
Sales order processing
Advertising support
Total selling and administrative activities	$
Income (loss) from operations	$	$	$