Question

Allocating selling and administrative expenses using activity-based costing

Instructions

Labels and Amount Descriptions

Activity rates

Activity Costs

Customer Profitability Report

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Instructions

Cold Zone Mechancial Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows:

1	Price per unit	$75,050.00
2	Cost of goods sold	59,850.00
3	Gross profit per unit	$15,200.00

In addition, the company incurs selling and administrative expenses of $247,175. The company wishes to assign these costs to its three major customers, Good Knowledge University, Hot Shotz Arena, and Break-a-Leg 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 bases associated with these activities are:

1	Activity	Budgeted Activity Cost	Activity Base
2	Customer service	$88,408.00	Number of service requests
3	Project bidding	66,538.00	Number of bids
4	Engineering support	92,229.00	Number of customer design changes
5	Total costs	$247,175.00

Activity-base usage and unit volume information for the three customers is as follows:

	Good Knowledge	Hot Shotz	Break-a-Leg
	University	Arena	Hospital	Total
Number of service requests	64	52	228	344
Number of bids	34	17	52	103
Number of customer design changes	44	32	137	213
Unit volume	23	13	5	41

	Required:
1.	Determine the activity rates for each of the three nonmanufacturing activity pools.
2.	Determine the activity costs allocated to the three customers, using the activity rates in (1).
3.	Construct customer profitability reports for the three customers, dated for the year ended December 31, using the activity costs in (2). The reports should disclose the gross profit and income from operations associated with each customer. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. “Less”, “Plus” or colons (:) will automatically appear if required. Enter all amounts as positive numbers, except for a negative income from operations.

X

Activity rates

1. Determine the activity rates for each of the three nonmanufacturing activity pools.

1			per serv. req.
2			per bid
3			per design change

X

Activity Costs

2. Determine the activity costs allocated to the three customers, using the activity rates in (1).

1		Activity Costs
2
3
4

X

Customer Profitability Report

3. Construct customer profitability reports for the three customers, dated for the year ended December 31, using the activity costs in (2). The reports should disclose the gross profit and income from operations associated with each customer. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. “Less”, “Plus” or colons (:) will automatically appear if required. Enter all amounts as positive numbers, except for a negative income from operations.

Cold Zone Mechanical Inc.

Customer Profitability Report

1		Good Knowledge University	Hot Shotz Arena	Break-a-Leg Hospital
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