Question

Allocating selling and administrative expenses using activity-based costing
Instructions
Labels and Amount Descriptions
Activity rates
Activity Costs
Customer Profitability Report
X
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
Labels and Amount Descriptions

Labels
December 31
For the Year Ended December 31
Selling and administrative activities
Amount Descriptions
Break-a-Leg Hospital
Cost of goods sold
Customer service
Engineering support
Good Knowledge University
Gross profit
Hot Shotz Arena
Income from operations
Other income (expense)
Plantwide factory overhead rate
Product cost distortion
Project bidding
Revenues
Total selling and administrative activities

X
Activity rates
Shaded cells have feedback.
1. Determine the activity rates for each of the three nonmanufacturing activity pools.
Score: 30/30

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

Points:
6 / 6
Feedback
Check My Work
Calculate for each activity:
Total activity cost ÷ Total activity base = Activity Rate
X
Activity Costs
Shaded cells have feedback.
2. Determine the activity costs allocated to the three customers, using the activity rates in (1).
Score: 0/30

1

Activity Costs
2
3
4

Points:
0 / 6
Feedback
Check My Work
Calculate for each customer:
Activity usage x Activity rate from Req. (1) = Activity cost; Sum all activity costs per customer to determine a total and divide the total overhead by budgeted units to derive the activity costs per unit for each customer.