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Unit 3 Exercise Question 1: Speed Racer, Inc., makes jet skis and other personal watercrafts for sale through specialty sporting goods stores. The company has a standard Jet Ski model, but also makes customdesigned models. Management has designed an activitybased costing system with the following activity cost pools and activity rates: Activity Cost Pool Activity Rates Supporting manufacturing $22 per direct labourhours Order processing $212 per order Customer design processing $243 per custom design Customer service $307 per customer Management would like an analysis of the profitability of a particular customer, WaveRider, which has ordered the following products over the last 12 months: Standard Model Custom Design Number of jet skis 16 3 Number of orders 2 3 Number of custom designs 0 3 24.5 28.0 $10,600 $13,200 $7,950 $9,240 Direct labourhours per jet ski Selling price per jet ski Direct materials cost per jet ski The company's direct labour rate is $24 per hour. Required: 1. Using the company's activitybased costing system, compute the customer margin of WaveRider. Question 2: Brookfield Property Management is a property management service company for small shopping malls and uses activitybased costing to estimate costs for pricing and other purposes. The proprietor of the company believes that costs are driven primarily by the area of outdoor maintenance (parking lots, sidewalks, and gardens), the area of indoor tenant space in the shopping mall, the distance to travel to the shopping mall, and the number of shopping malls managed. In addition, the costs of managing the indoor tenant space depend on whether the tenants are located on the main level or other levels of the mall. Accordingly, the company uses the five activity cost pools listed below: Activity Cost Pool Activity Measure Management of outdoor areas Square meters of outdoor areas Management of indoor mall space - main level Square meters of main level mall space Management of indoor mall space - other levels Square meters of nonmain level mall space Travel to jobs Kilometers Customer billing and service Number of shopping malls The company has already carried out its firststage allocations of costs. The company's annual costs and activities are summarized as follows: Activity Cost Pool Management of outdoor areas Estimated Overhead Cost Expected Activity $69,850 127,000 square meters of outdoor areas Management of indoor mall space - main level $114,400 104,000 square meters of main level mall space Management of indoor mall space - other levels $307,500 246,000 square meters of non main level mall space Travel to jobs Customer billing and service $6,600 22,000 kilometers $13,800 8 shopping malls Required: 1. Compute the activity rate for each of the activity cost pools. Question 3: Go Pro Corporation makes golf carts that it sells directly to golf courses throughout the world. Several basic models are available, which are modified to suit the needs of each particular golf course. A golf course located in British Columbia, for example, would typically specify that its golf carts come equipped with retractable rainproof covers. In addition, each customer (i.e., golf course) customizes its golf carts with its own colour scheme and logo. The company typically makes all of the golf carts for a customer before starting work on the next customer's golf carts. Below are listed a number of activities and costs at Go Pro Corporation: Activity Level 1) The purchasing department orders the specific colour of paint specified by the customer from the company's supplier. 2) A steering wheel is installed in a golf cart. 3) The company's paint shop makes a stencil for a customer's logo. 4) Completed golf carts are individually tested on the company's test track. 5) The accounts receivable department prepares the bill for a completed order. 6) An outside lawyer draws up a new generic sales contract for the company, limiting Go Pro's liability in case of accidents that involve its golf carts. 7) Electricity is used to heat and light the factory and the administrative offices. 8) A golf cart is painted. 9) A sales representative visits a previous customer to check on how the company's golf carts are working out and to try to make a new sale. 10) A new model golf cart is shipped to the leading golfing trade magazine to be evaluated for the magazine's annual rating of golf carts. 11) The company's engineer modifies the design of a model to eliminate a potential safety problem. 12) The marketing department has a catalogue printed and then mails copies to golf course managers. Required: 1. Classify each of the costs or activities above as unitlevel, batchlevel, productlevel, customerlevel, or organizationsustaining. In this case, customers are golf courses, products are the various models of the golf cart, a batch is a specific order from a customer, and units are individual golf carts. Question 4: Wild Wild West Co. manufactures two products, Stirrups and Saddles. The company estimated it would incur $160,790 in manufacturing overhead costs during the current period. Overhead currently is applied to the products on the basis of direct labour hours. Data concerning the current period's operations appear below: Stirrups Saddles Estimated volume 3,400 units 4,800 units Direct labour hours per unit 1.40 hour 1.90 hours Direct materials cost per unit $7.40 $12.70 Direct labour cost per unit $14.00 $19.00 Required: 1. Compute the predetermined overhead rate under the current method, and determine the unit product cost of each product for the current year. 2. The company is considering using an activitybased costing system to compute unit product costs for external financial reports instead of its traditional system based on direct labour hours. The activitybased costing system would use three activity cost pools. Data relating to these activities for the current period are given below: Activity Cost Pool Estimated Overhead Costs Expected Activity: Stirrups Expected Activity: Saddles Total Machine setups $12,190 80 150 230 Purchase orders 79,200 730 920 1,650 General factory 69,400 4,760 9,120 13,880 $160,790 Total 3. Determine the unit product cost of each product for the current period using the activitybased costing approach