Chapter 4, Problem 5PB

Allocating selling and administrative expenses using activity-based costing

Shrute Inc. manufactures office copiers, which are sold to retailers. The price and cost of goods sold for each copier are as follows:

In addition, the company incurs selling and administrative expenses of $414,030. The company wishes to assign these costs to its three major retail customers, The Warehouse, Kosmo Co., and Supply Universe. These expenses are related to its three major nonmanufacturing activities: customer service, sales order processing, and advertising support. The advertising support is in the form of advertisements that are placed by Shrute Inc. to support the retailer’s sale of Shrute copiers to consumers. 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

Determine the activity rates for each of the three nonmanufacturing activities.

Determine the activity costs allocated to the three customers, using the activity rates in (1).

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.

Provide recommendations to management, based on the profitability reports in (3).