Concept explainers
(1)
Activity-based costing (ABC) method: The costing method which allocates
Formula to compute activity-based overhead rate:
To compute: The activity-based overhead rate for each of the given activities
(1)

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 compute: The activity-cost allocated to each of the customers.
(2)

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 draft: Customer profitability report of Incorporation CZ for the year ended December 31
(3)

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 discuss: The inferences from the customer profitability report.
(4)

Explanation of Solution
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Chapter 26 Solutions
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