Koontz Company manufactures two models of industrial components—a 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. Koontz’s 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 company’s 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 3. Koontz’s production manager has suggested using activity-based costing instead of either the plantwide or departmental approaches. To facilitate the necessary calculations, she assigned the company’s total manufacturing overhead cost to five activity cost pools as follows: 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 company’s 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.
Koontz Company manufactures two models of industrial components—a Basic model and an Advanced Model. The company considers all of its manufacturing
| 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 company’s 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 | ||||
3. Koontz’s production manager has suggested using activity-based costing instead of either the plantwide or departmental approaches. To facilitate the necessary calculations, she assigned the company’s total manufacturing overhead cost to five activity cost pools as follows:
| 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 company’s 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.
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