Victorian Windows is a small company that builds specialty wooden windows for local builders. For years the company assigned overhead costs to products based on direct labor-hours (DLHs). However, the company's president became interested in activity-based costing after reading an article about it in a trade journal. An activity-based costing design team was put together, and within a few months a simple system consisting of four activity cost pools had been designed. The activity cost pools and their activity measures appear below:

The Processing Orders activity includes order taking, job setup, job scheduling, and so on. Direct materials and direct labor are directly assigned to jobs in both the traditional and activity-based costing systems. The total overhead cost (both nonmanufacturing and manufacturing) for the year is $1,180,000 and includes the following costs:

Based largely on interviews with employees, the distribution of resource consumption across the activities has been estimated as follows:

Management of the company is particularly interested in measuring the profitability of two customers. One of the customers, Avon Construction, is a low-volume purchaser. The other, Lynx Builders, is a relatively high-volume purchaser. Details of these two customers' orders for the year appear below:

Required:
1. The company's traditional costing system applies manufacturing overhead to jobs strictly on the basis of direct labor-hours. Using this traditional approach, carry out the following steps:
a. Compute the predetermined manufacturing overhead rate.
b. Compute the total margin for all of the windows ordered by Avon Construction according to the traditional costing system. Do the same for Lynx Builders.
2. Using activity-based costing, do the following:
a. Using Exhibit 8–5 as a guide, perform the first-stage allocation of costs to the activity cost pools.
b. Using Exhibit 8A–2 as a guide, compute the activity rates for the activity cost pools.
c. Compute the overhead costs of serving each of the two customers. (You will need to construct a table like Exhibit 8A–3 for each customer. However, unlike Exhibit 8A–3, you should fill in the column for Customer Relations as well as the other columns. Exhibit 8A–3 was constructed for a product; in this case we are interested in a customer.)
d. Management has provided the following ease of adjustment codes to use in action analysis reports:
Ease of
Adjustment Code
Direct materials . . . . . . . . . . . . . . . . . . . . . . Green
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . Yellow
Indirect factory wages . . . . . . . . . . . . . . . . . Yellow
Production equipment depreciation . . . . . . . Yellow
Other factory costs . . . . . . . . . . . . . . . . . . . Yellow
Administrative wages and salaries . . . . . . Red
Office expenses . . . . . . . . . . . . . . . . . . . . . . Yellow
Marketing expenses . . . . . . . . . . . . . . . . . . Yellow

Using Exhibit 8A–5 as a guide, prepare an action analysis report showing the margin on business with Avon Construction. Repeat for Lynx Builders.
3. Does Victorian Windows appear to be losing money on either customer? Do the traditional and activity-based costing systems agree concerning the profitability of the customers? If they do not agree, which costing system do you believe?Why?

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Activity Measure Total Activity for the Year Activity Cost Pool Making windows Processing orders Number of orders Customer relations .. . Number of customers Other (costs of idle capacity Direct labor-hours 80,000 DLHs 1,000 orders 200 customers and organization- sustaining costs) .. . None Not applicable Manufacturing overhead costs: S240,000 Production equipment depreciation250,000 Other factory costs. 110,000 600,000 Selling and administrative expenses: Administrative wages and salaries. Office expenses Marketing expenses. 240,000 60,000 2 280000 580.000 580,000 Total overhead cost. . .. $1,180,000 Distribution of Resource Consumption Across Activities Making Processing Customer Windows Orders Relations Other Total 25% 10% 0% 0% 35% 30% 75% 15% 20% 60% 40% 50% 25% 100% 100% 100% 100% 100% 100% Indirect factory wages.. 50% 0% 0% Other factory costs Administrative wages and salaries Office expenses Marketing expenses . . 40% 0% 0% 0% 20% 0% . Avon Construction Lynx Builders Number of orders during the year Total direct labor-hours Total sales Total direct materials Total direct labor coSt 2 orders 250 DLHs $9,995 $3,400 $4,500 3 orders 1,500 DLH:s $54,995 $17,200 $27,000