Volt-Gear Inc. manufactures power equipment. Volt-Gear has two primary products—

Question

Volt-Gear Inc. manufactures power equipment. Volt-Gear has two primary products—generators and air compressors. The following report was prepared by the controller for Volt-Gear senior marketing management for the year ended Dec. 31, 2014:

The marketing management team was concerned that the selling and administrative expenses were not traced to the products. Marketing management believed that some products consumed larger amounts of selling and administrative expense than did other products. To verify this, the controller was asked to prepare a complete product profitability report, using activity-based costing.

The controller determined that selling and administrative expenses consisted of two activities: sales order processing and post-sale customer service. The controller was able to determine the activity base and activity rate for each activity, as shown below.

a. Determine the activity cost of each product for sales order processing and post-sale customer service activities.

Total

$

Total

$

Explanation / Answer

Generators Air compressors Total Number of Sales order 1044 1430 2474 Number of service requests 168 530 698 Total Number of order's & requests 1212 1960 3172 Selling and administrative expense 336900 We will now appportion expenses on basis of cost drivers identified Apportionment of expense on basis of Total sales order and service request in ratio of 2474 : 698 Cost apportioned to sales order = (336900 / 3172) x 2474 262765 Cost apportioned to service request = (336900 / 3172) x 698 74135 Total 336900 Further Sales order cost to be apportioned beetween Generators and Air compressor in ratio 1044 : 1430 Cost apportioned to Generators = ( 262765/2474) x 1044 110884 Cost apportioned to Air compressor = ( 262765/2474) x 1430 151881 Total 262765 Service request cost to be apportioned beetween Generators and Air compressor in ratio 168: 530 Cost apportioned to Generators = (74135 / 698) x 168 17843 Cost apportioned to Air compressor = (74135 / 698) x 530 56292 Total 74135 a) Sales order cost Post sale service request Gererators 110884 17843 Air compressor 151881 56292 Total 262765 74135 b) Generators Air compresor Total Revenues 1500000 1000000 2500000 Cost of goods sold 1080000 720000 1800000 Gross Profit ( Revenue -COGS) 420000 280000 700000 Sales order processing 110884 151881 262765 Post sale customer servive 17843 56292 74135 Total selling and administrative 128727 208173 336900 Income from opertaions 291273 71827 363100 Gross profit as % to sales 28% 28% 28% Income from opertaions as % to sales 19% 7% 15%

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