
Concept explainers
a.
Compute the income statement using activity-based costing and WCC’s three cost drivers.
a.

Explanation of Solution
Activity-based costing:
Activity-based costing refers to the method of costing where the
Compute the rate per overhead:
Particulars | Rate |
Administrative support | $ 4,000.00 |
Transportation | $ 144.00 |
Equipment | $ 12.50 |
Table: (1)
Compute the income statement using activity-based costing and WCC’s three cost drivers:
Particulars | Teen counseling | Executive coaching | Total |
Revenue | $66,000.00 | $135,000.00 | $201,000.00 |
Overhead: | |||
Administrative support | $24,000.00 | $16,000.00 | $40,000.00 |
Add: Transportation | $14,400.00 | $21,600.00 | $36,000.00 |
Add: Equipment | $11,250.00 | $8,750.00 | $20,000.00 |
Total overhead | $49,650.00 | $46,350.00 | $96,000.00 |
Profit | $16,350.00 | $88,650.00 | $105,000.00 |
Table: (2)
Thus, the profit of teen counseling and executive coachings are $16,350 and $88,650 respectively.
b.
Recompute the income statement according to the information given in the question.
b.

Explanation of Solution
Activity-based costing:
Activity-based costing refers to the method of costing where the overhead cost is assigned to various products. This costing method identifies the relationship between the manufacturing overhead costs and the activities. This relationship is then used to allocate indirect costs to the products.
Compute the income statement according to the information given in the question:
Particulars | Teen counseling | Executive coaching | Total |
Revenue | $66,000.00 | $135,000.00 | $201,000.00 |
Expenses | $31,522.39 | $64,477.61 | $96,000.00 |
Profit | $34,477.61 | $70,522.39 | $105,000.00 |
Table: (3)
Working note 1:
Compute the rate per hour for expenses:
Working note 2:
Compute the number of hours:
c.
Determine the impact of the decision taken regarding the situation given in the question.
c.

Explanation of Solution
Situation given in the question:
Decisions regarding pricing or dropping a service be altered if all the overhead costs were allocated using direct labor-hours.
Impact of the decision being advised in the question:
Teen counseling and executive coaching are equally profitable when using labor-based costing system. Hence, the decision would be to not drop either of the services as the profit is almost equal when using labor-based costing system.
d.
Determine the circumstances where labor-based allocation and activity-based costing would result in similar profit.
d.

Explanation of Solution
Circumstances where labor-based allocation and activity-based costing would result in similar profit:
If there are comparable product-line profits with respect to the smaller portion of costs of overhead or the cost drivers are correlated close to 1 in accordance with volume-related allocation base the labor-based allocation, and activity-based costing would result in similar profit.
e.
Determine whether or not it would be ethical for W to report the income using the method given in the question and which allocation method would give them the best chance of winning a grant.
e.

Explanation of Solution
The implication of using ABC (activity-based costing) system:
ABC system is assigning higher costs to the services of teen counseling as compared to the traditional method is implementing.
The ethical dilemma of using the favorable costing system:
The dilemma of using the favorable costing system arises as there is no confirmation regarding the choice of ABC method for costing is solely to make the situation favorable. If there is no reason other than using the ABC method to make the outcome favorable then using ABC would be unethical.
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