Allocating Selling and Administrative Expenses using Activity-Based Costing West

Question

Allocating Selling and Administrative Expenses using Activity-Based Costing

Western Mechanical 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 $316,520. The company wishes to assign these costs to its three major customers, Coastal Atlantic University, Celebrity Arena, and Hope Hospital. 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:

Required:

1. Determine the activity rates for each of the three nonmanufacturing activity pools. Round to the nearest whole dollar.

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

3. Construct customer profitability reports for the three customers, dated for the year ended December 31, 2014, using the activity costs in (2). The reports should disclose the gross profit and income from operations associated with each customer. Enter all amounts as positive numbers, except for a negative income from operations.

Western Mechanical Inc.

Customer Profitability Report

For the Year Ended December 31, 2014

Coastal Atlantic University

Celebrity Arena

Hope Hospital

Revenues

$  

$  

$  

Less cost of goods sold

  

  

  

Gross profit

$  

$  

$  

Less selling and administrative activities:

Customer service

$  

$  

$  

Project bidding

  

  

  

Engineering support

  

  

  

$  

$  

$  

Income (loss) from operations

$  

$  

$  

Price $730 per unit Cost of goods sold 440 Gross profit $290 per unit

Explanation / Answer

(1) the activity rates for each of the three non manufacturing activity pools:

(2) the activity costs allocated to the three customers, using the activity rates in (1) ;

(3) customer profitability reports for the three customers, dated for the year ended December 31, 2014:

Non- Manufacturing Activity Pools activity rate $ Customer Service $152 per service request Project Bidding $32 per bid Engineering Support $1420 per customer design change

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