Chapter 4, Problem 5PA

Allocating selling and administrative expenses using activity-based costing

Arctic Air Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows:

In addition, the company incurs selling and administrative expenses of $226,250. The company wishes to assign these costs to its three major customers, Gough Industries, Breen Inc., and The Martin Group. 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:

Activity-base usage and unit volume information for the three customers is as follows:

Instructions

1. 1. Determine the activity rates for each of the three nonmanufacturing activity pools.
2. 2. Determine the activity costs allocated to the three customers, using the activity rates in (1).
3. 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 operating income associated with each customer.
4. 4. Provide recommendations to management, based on the profitability reports in (3).