Koontz Company manufactures two models of industrial componentsa Basic model and an Advanced Model. The company considers all of its manufacturing overhead costs to be fixed and it uses plantwide manufacturing overhead cost allocation based on direct labor-hours. Koontzs controller prepared the segmented income statement that is shown below for the most recent year (he allocated selling and administrative expenses to products based on sales dollars):

	Basic			Advanced			Total
Number of units produced and sold		20,000			10,000		30,000
Sales	$	3,000,000		$	2,000,000	$	5,000,000
Cost of goods sold		2,300,000			1,350,000		3,650,000
Gross margin		700,000			650,000		1,350,000
Selling and administrative expenses		720,000			480,000		1,200,000
Net operating income (loss)	$	(20,000	)	$	170,000	$	150,000

Direct laborers are paid $20 per hour. Direct materials cost $40 per unit for the Basic model and $60 per unit for the Advanced model. Koontz is considering a change from plantwide overhead allocation to a departmental approach. The overhead costs in the companys Molding Department would be allocated based on machine-hours and the overhead costs in its Assembly and Pack Department would be allocated based on direct labor-hours. To enable further analysis, the controller gathered the following information:

	Molding			Assemble and Pack			Total
Manufacturing overhead costs	$	787,500		$	562,500	$	1,350,000
Direct labor hours:
Basic		10,000			20,000		30,000
Advanced		5,000			10,000		15,000
Machine hours:
Basic		12,000			-		12,000
Advanced		10,000			-		10,000

Required:

1. Using the plantwide approach:

a. Calculate the plantwide overhead rate.

b. Calculate the amount of overhead that would be assigned to each product.

2. Using a departmental approach:

a. Calculate the departmental overhead rates.

b. Calculate the total amount of overhead that would be assigned to each product.

c. Using your departmental overhead cost allocations, redo the controllers segmented income statement (continue to allocate selling and administrative expenses based on sales dollars).

Activity Cost Pool	Activity Measure	Manufacturing Overhead
Machining	Machine-hours in Molding	$	417,500
Assemble and pack	Direct labor hours in Assemble and Pack		282,500
Order processing	Number of customer orders		230,000
Setups	Setup hours		340,000
Other (unused capacity)			80,000
		$	1,350,000

She also determined that the average order size for the Basic and Advanced models is 400 units and 50 units, respectively. The molding machines require a setup for each order. One setup hour is required for each customer order of the Basic model and three hours are required to setup for an order of the Advanced model.

The company pays a sales commissions of 5% for the Basic model and 10% for the Advanced model. Its traceable fixed advertising costs include $150,000 for the Basic model and $200,000 for the Advanced model. The remainder of the companys selling and administrative costs are organization-sustaining in nature.

Using the additional information provided by the production manager, calculate:

a. An activity rate for each activity cost pool.

b. The total manufacturing overhead cost allocated to the Basic model and the Advanced model using the activity-based approach.

c. The total selling and administrative cost traced to the Basic model and the Advanced model using the activity-based approach.

4. Using your activity-based cost assignments from requirement 3, prepare a contribution format segmented income statement that is adapted from Exhibit 4-8. (Hint: Organize all of the companys costs into three categories: variable expenses, traceable fixed expenses, and common fixed expenses.)

2. b. Calculate the total amount of overhead that would be assigned to each product.

	Basic	Advanced
Molding Department
Assemble and Pack Department	375,000	187,500
Total manufacturing overhead assigned	$375,000	$187,500

2.C.

Using your departmental overhead cost allocations, redo the controllers segmented income statement (continue to allocate selling and administrative expenses based on sales dollars). (Round your intermediate calculations to 2 decimal places.)

	Basic	Advanced
Sales	$3,000,000	$2,000,000
Cost of goods sold
Gross margin
Selling and administrative expenses	720,000	480,000
Net operating income

4.

Using your activity-based cost assignments from requirement 3, prepare a contribution format segmented income statement. (Round your intermediate calculations to 2 decimal places.)

Koontz Company
Income statement
	Total	Basic	Advanced
Sales	$5,000,000	$3,000,000	$2,000,000
Variable expenses:
Direct materials	1,400,000	800,000	600,000
Direct labor	900,000	600,000	300,000
Sales commissions	350,000	150,000	200,000
Total variable expenses	2,650,000	1,550,000	1,100,000
Contribution margin	2,350,000	1,450,000	900,000
Traceable fixed expenses:
Advertising	350,000	150,000	200,000
Machining
Total traceable fixed expenses		150,000	200,000
Segment margin		$1,300,000	$700,000
Common fixed expenses:
Total common fixed expenses	0
	$0