Exercise 3A: ABC Hierarchy of Costs

Activity-based costing (ABC costing) defines 5 levels of activity that we will identify with letters for the purposes of this exercise.U: Unit-level L: Batch-levelP: Product-level C: Customer-levelS: sustainability of the entity (Organization-sustaining)The company Todo Inc., which manufactures various products, performs the following activities. Classify each activity within one of the levels. Place the corresponding letter in the box.

Level	Activity
	Production line employees assemble the products.
	Employees from the Human Resources department train line employees.
	Three employees are in charge of the inventory of the parts that are used to manufacture the products.
	Various engineers design new products.
	A purchasing clerk places new orders for materials for the manufacture of the ordered product.
	A warehouse clerk issues orders for materials for production.
	Two mechanical engineers perform periodic preventative maintenance on the equipment used for manufacturing.
	The Marketing department prepares the quarterly catalog of products for sale.

Exercise 3B: Calculate the activity rates (Activity rates)

Pool Services, Inc. is a service company dedicated to the maintenance and cleaning of home swimming pools. Your owner understands that the costs depend on the number of gallons of water that the pool contains, the distance to reach each client and the total number of clients. It also depends on whether they are continuously used pools that require more maintenance or low-use pools that require more maintenance and filter cleaning is considered separately as it requires an hour of employee labor and specific materials.Required:Use the annual costs and activities summarized below and calculate the activity rate for each of the cost activities

cost activities	Activity expected for each unit of measure of activity level (inducers)	Costo total	Total cost
Low-use pool maintenance	5,400,000 gallons of high-use pool water	$60,000
Maintenance of swimming pools of a lot of use	1,300,000 gallons of high-use pool water	$39,800
Filter cleaning	400 filter maintenance	$29,500
Trips to each pool	19,000 miles	$64,600
Billing and customer service	200 clients	$44,600

Exercise 3C: Indirect Cost Assignment-Second Stage Distribution Gester Corp. is a company that manufactures various products. The company has defined the following activities and activity rates in its activity-based costing system.

direct labor	$8.75 per direct labor hour
machine processing	$3.70 per machine hour
Machine preparation	$68 each preparation
Production order	$230 for each order
Shipping and handling	$160 per shipment
Product Sustainability	$1,300 per product

Exercise 3D: Product and customer profitability analysis

LMN Excercise, Inc. manufactures portable infrared saunas. He markets and sells them to gyms and spas who in turn sell them to his individual clients. The company has a generic model but also makes models to customer specifications, especially for gyms. The cost activities and their respective rates in the costing system by activity of the company are the following:

cost activity	Activity rate
Design with customer specifications	$300 for each design
Order processing	$215 per order
Customer service	$475 per client
Direct support labor	$19.80 per labor hour

Management has asked you for a profitability analysis of customer Z. You have been provided with the following information regarding orders from this customer in the past 12 months.

Direct labor rate : $21/hora

	generic model	model with specifications
Number of saunas	10	4
Quantity of orders	2	1
Number of designs with specifications	0	4
Direct labor for each sauna	31 hours	35 hours
Sale price per sauna	$2,900	$3,750
Cost of materials per sauna	$600	$750

Required:

Calculate the margin or profitability of customer Z.