Allocating Selling and Administrative Expenses using Activity-Based Costing
Western Mechanical Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows:
Price | $660 per unit |
Cost of goods sold | 400 |
Gross profit | $260 | per unit |
In addition, the company incurs selling and administrative expenses of $266,830. The company wishes to assign these costs to its three major customers, Coastal Atlantic University, Celebrity Arena, and Hope Hospital. 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 basesassociated with these activities are:
Activity | Budgeted Activity Cost | Activity Base |
Customer service | $45,210 | | Number of service requests |
Project bidding | 33,120 | | Number of bids |
Engineering support | 188,500 | | Number of customer design changes |
| Total costs | $266,830 | | |
Activity-base usage and unit volume information for the three customers is as follows:
| Coastal Atlantic University | Celebrity Arena | Hope Hospital | Total |
Number of service requests | 70 | | | 10 | | 250 | | 330 | |
Number of bids | 260 | | | 110 | | 550 | | 920 | |
Number of customer design changes | 20 | | | 10 | | 100 | | 130 | |
Unit volume | 610 | | | 610 | | 610 | | 1,830 | |
Required:
Hint(s)
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 customer design change |
2. Determine the activity costs allocated to the three customers, using the activity rates in (1).
| Activity Costs |
Coastal Atlantic University | $ |
Celebrity Arena | $ |
Hope Hospital | $ 3. Construct customer profitability reports for the three customers, dated for the year ended December 31, 2014, 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 | Customer Profitability Report | | For the Year Ended December 31, 2014 | | | | Coastal Atlantic University | | | | | | | | | | | | | |
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Less selling and administrative activities: | | | | | | | |
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Income (loss) from operations | | | | | | | |