Chapter 26, Problem 26.5APR

(1)

To determine

Activity-based costing (ABC) method: The costing method which allocates overheads to the products based on factory overhead rate for each activity or cost object, according to the cost pooled for the cost drivers (allocation base).

Formula to compute activity-based overhead rate:

$\begin{array}{l}\text{Activity-based}\\ \text{overhead rate}\end{array}\}\text{ = }\frac{\text{Budgeted activity cost}}{\text{Total activity-base usage}}$

To compute: The activity-based overhead rate for each of the given activities

Explanation of Solution

Compute activity-based overhead rates.

Computation of Activity-Based Overhead Rates
Activity Cost Pools	Activity Cost	÷	Total Activity-Base Usage	=	Activity-Based Overhead Rates
Customer service	$83,720	÷	322 requests	=	$260 per request
Project bidding	61,360	÷	104 bids	=	$590 per bid
Engineering support	86,800	÷	217 design changes	=	$400 per change

Table (1)

(2)

To determine

To compute: The activity-cost allocated to each of the customers.

Explanation of Solution

Compute activity cost allocated to GK University.

Activity Cost Pools	Activity-Based Overhead Rates	×	Actual Use of Activity-Base	=	Activity Cost Allocated
Customer service	$260 per request	×	60 requests	=	$15,600
Project bidding	$590 per bid	×	36 bids	=	21,240
Engineering support	$400 per change	×	45 changes	=	18,000
Total activity costs allocated to GK University					$54,840

Table (2)

Note: Refer to Table (1) for value and computation of activity-based overhead rates.

Compute activity cost allocated to HS Arena.

Activity Cost Pools	Activity-Based Overhead Rates	×	Actual Use of Activity-Base	=	Activity Cost Allocated
Customer service	$260 per request	×	52 requests	=	$13,520
Project bidding	$590 per bid	×	18 bids	=	10,620
Engineering support	$400 per change	×	30 changes	=	12,000
Total activity costs allocated to HS Arena					$36,140

Table (3)

Note: Refer to Table (1) for value and computation of activity-based overhead rates.

Compute activity cost allocated to BL Hospital.

Activity Cost Pools	Activity-Based Overhead Rates	×	Actual Use of Activity-Base	=	Activity Cost Allocated
Customer service	$260 per request	×	210 requests	=	$54,600
Project bidding	$590 per bid	×	50 bids	=	29,500
Engineering support	$400 per change	×	142 changes	=	56,800
Total activity costs allocated to BL Hospital					$140,900

Table (4)

Note: Refer to Table (1) for value and computation of activity-based overhead rates.

(3)

To determine

To draft: Customer profitability report of Incorporation CZ for the year ended December 31

Explanation of Solution

Prepare customer profitability report of Incorporation CZ for the year ended December 31.

Incorporation CZ
Customer Profitability Report
For the Year Ended December 31
	GK University	HS Arena	BL Hospital
Revenues	$1,650,000	$1,050,000	$450,000
Cost of goods sold	1,320,000	840,000	360,000
Gross profit	330,000	210,000	90,000
Selling and administrative expenses:
Customer service	$15,600	$13,520	$54,600
Project bidding	21,240	10,620	29,500
Engineering support	18,000	12,000	56,800
Total selling expenses	54,840	36,140	140,900
Income (loss) from operations	$275,160	$173,860	$(50,900)

Table (5)

Working Notes:

Refer to Tables (2), (3) and (4) for value and computation of selling and administrative expenses for the three customers.

Compute sales revenues for each of the customers.

Customers	Number of Units Sold	×	Selling Price Per Unit	=	Sales Revenue
GK University	22 units	×	$75,000	=	$1,650,000
HS Arena	14 units	×	75,000	=	1,050,000
BL Hospital	6 units	×	75,000	=	450,000

Table (6)

Compute cost of goods sold for each customer.

Customers	Number of Units Sold	×	Cost Price Per Unit	=	Cost of Goods Sold
GK University	22 units	×	$60,000	=	$1,320,000
HS Arena	14 units	×	60,000	=	840,000
BL Hospital	6 units	×	60,000	=	360,000

Table (7)

(4)

To determine

To discuss: The inferences from the customer profitability report.

Explanation of Solution

GK University and SH Arena are profitable customers whereas BL Hospital is at loss. This is due to the high activity costs for all the three activities. BL Hospital should increase its sales volume to overcome its costs. Due to high costs and low revenues, the customer experienced losses.