Naper Inc. manufactures power equipment. Naper has two primary products-generators and air compressors. The following report was prepared by the controller for Naper's senior marketing management for the year ended December 31: Generators Air Compressors Total $ 4,200,000 (2,940,000) $ 1,260,000 $ 3,000,000 $ 7,200,000 (5,040,000) $ 2,160,000 (610,000) $ 1,550,000 Revenue Cost of goods sold Gross profit Selling and administrative expenses Operating income (2,100,000) $ 900,000 The marketing management team was concerned that the selling and administrative expenses were not traced to the products. Marketing management believed that some products consumed larger amounts of selling and administrative expense than did other products. To verify this, the controller was asked to prepare a complete product profitability report, using activity-based costing. The controller determined that selling and administrative expenses consisted of two activities: sales order processing and post-sale customer service. The controller was able to determine the activity base and activity rate for each activity, as follows: Activity Activity Base Activity Rate Sales order processing Sales orders $65 per sales order $200 per customer service request Post-sale customer service Service requests The controller determined the following activity-base usage information about each product: Generators Air Compressors Number of sales orders 3,000 4,000 Number of service requests 225 550 a. Determine the activity cost of each product for sales order processing and post-sale customer service activities. b. Use the information in (a) to prepare a complete product profitability report dated for the year ended December 31. Compute the gross profit to sales and the operating income to sales per- centages for each product. Round to two decimal places. C. Interpret the product profitability report. How should management respond to the report?
Naper Inc. manufactures power equipment. Naper has two primary products-generators and air compressors. The following report was prepared by the controller for Naper's senior marketing management for the year ended December 31: Generators Air Compressors Total $ 4,200,000 (2,940,000) $ 1,260,000 $ 3,000,000 $ 7,200,000 (5,040,000) $ 2,160,000 (610,000) $ 1,550,000 Revenue Cost of goods sold Gross profit Selling and administrative expenses Operating income (2,100,000) $ 900,000 The marketing management team was concerned that the selling and administrative expenses were not traced to the products. Marketing management believed that some products consumed larger amounts of selling and administrative expense than did other products. To verify this, the controller was asked to prepare a complete product profitability report, using activity-based costing. The controller determined that selling and administrative expenses consisted of two activities: sales order processing and post-sale customer service. The controller was able to determine the activity base and activity rate for each activity, as follows: Activity Activity Base Activity Rate Sales order processing Sales orders $65 per sales order $200 per customer service request Post-sale customer service Service requests The controller determined the following activity-base usage information about each product: Generators Air Compressors Number of sales orders 3,000 4,000 Number of service requests 225 550 a. Determine the activity cost of each product for sales order processing and post-sale customer service activities. b. Use the information in (a) to prepare a complete product profitability report dated for the year ended December 31. Compute the gross profit to sales and the operating income to sales per- centages for each product. Round to two decimal places. C. Interpret the product profitability report. How should management respond to the report?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Concept explainers
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
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Transcribed Image Text:Naper Inc. manufactures power equipment. Naper has two primary products-generators and air
compressors. The following report was prepared by the controller for Naper's senior marketing
management for the year ended December 31:
Generators
Air Compressors
Total
$ 4,200,000
(2,940,000)
$ 1,260,000
$ 3,000,000
$ 7,200,000
(5,040,000)
$ 2,160,000
(610,000)
$ 1,550,000
Revenue
Cost of goods sold
Gross profit
Selling and administrative expenses
Operating income
(2,100,000)
$ 900,000
The marketing management team was concerned that the selling and administrative expenses
were not traced to the products. Marketing management believed that some products consumed
larger amounts of selling and administrative expense than did other products. To verify this, the
controller was asked to prepare a complete product profitability report, using activity-based costing.
The controller determined that selling and administrative expenses consisted of two activities:
sales order processing and post-sale customer service. The controller was able to determine the
activity base and activity rate for each activity, as follows:
Activity
Activity Base
Activity Rate
Sales order processing
Sales orders
$65 per sales order
$200 per customer service request
Post-sale customer service
Service requests
The controller determined the following activity-base usage information about each product:
Generators
Air Compressors
Number of sales orders
3,000
4,000
Number of service requests
225
550
Transcribed Image Text:a. Determine the activity cost of each product for sales order processing and post-sale customer
service activities.
b. Use the information in (a) to prepare a complete product profitability report dated for the year
ended December 31. Compute the gross profit to sales and the operating income to sales per-
centages for each product. Round to two decimal places.
C.
Interpret the product profitability report. How should management respond to the
report?
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