Question

Pickle Motorcycles, Inc. (PMI), manufactures three motorcycle models: a cruising bike (Route 66), a street bike (Main Street), and a starter model (Alley Cat). Because of the different materials used, production processes for each model differ significantly in terms of machine types and time requirements. Once parts are produced, however, assembly time per unit required for each type of bike is similar. For this reason, PMI allocates overhead on the basis of machine-hours. Last year, the company shipped 1,100 Route 66s, 2,100 Main Streets, and 4,500 Alley Cats and had the following revenues and expenses:

PICKLE MOTORCYCLES, INC. Income Statement
	Route 66			Main Street			Alley Cat			Total
Sales revenue	$	7,600,000		$	12,100,000		$	9,300,000		$	29,000,000
Direct costs
Direct materials		3,300,000			4,800,000			3,900,000			12,000,000
Direct labor		281,000			478,000			1,030,000			1,789,000
Variable overhead
Machine setup											475,000
Order processing											1,440,000
Warehousing costs											2,112,000
Energy to run machines											750,000
Shipping											830,000
Contribution margin										$	9,604,000
Fixed overhead
Plant administration											1,740,000
Other fixed overhead											2,840,000
Gross profit										$	5,024,000

PMI's chief financial officer (CFO) hired a consultant to recommend cost allocation bases. The consultant recommended the following:

		Activity Level
Activity	Cost Driver	Route 66		Main Street		Alley Cat
Setting up machines	Number of production runs	25		30		40
Processing orders	Number of sales orders received	500		700		600
Warehousing	Number of units held in inventory	220		240		420
Using energy	Machine-hours	10,000		16,000		24,000
Shipping	Number of units shipped	800		3,800		12,000

The consultant found no basis for allocating the plant administration and other fixed overhead costs and recommended that these not be applied to products.

Required:

a. Using machine-hours to allocate production overhead, complete the income statement for Pickle Motorcycles. (See the "using energy" activity for machine-hours.) Do not attempt to allocate plant administration or other fixed overhead. (Round your variable overhead rate to 2 decimal places and your final answers to the nearest whole dollar amount.)

b. Complete the income statement using the bases recommended by the consultant. (Do not round intermediate calculations.)

c. How might activity-based costing result in better decisions by Pickle Motorcycles's management?

• The activity-based costing method provides a more detailed breakdown of the costs.

• The activity-based costing method provides a consolidated summary of the costs.

rev: 05_10_2016_QC_CS-51396

Answer 1

a. Using machine-hours to allocate production overhead, complete the income statement for Pickle Motorcycles. (See the "using energy" activity for machine-hours.) Do not attempt to allocate plant administration or other fixed overhead.

PICKLE MOTORCYCLES, INC. Income Statement

	Route 66	Main Streets	Alley Cats	Total
Sales revenue	7,600,000	12,100,000	9,300,000	$29,000,000
Direct costs
Direct materials	3300000	4800000	3900000	12000000
Direct labor	281000	478000	1030000	1789000
Variable overhead	1121400	1794240	2691360	$56,07,000
Contribution margin	$28,97,600	$50,27,760	$16,78,640	$96,04,000
Fixed overhead
Plant administration				1740000
Other fixed overhead				2840000
Gross profit				$50,24,000

.

Predetermined variable overhead rate = Total variable cost / Total machine-hours

Total variable cost =

Machine setup	475,000
Order processing	1,440,000
Warehousing costs	2,112,000
Energy to run machines	750,000
Shipping	830,000
Total variable cost	$56,07,000

Total machine-hours

	Route 66	Main Streets	Alley Cats	Total
Machine-hours	10,000	16,000	24,0000	50000

.

Predetermined variable overhead rate = $56,07,000 / 50000 = 112.14

For each model

.	Route 66	Main Streets	Alley Cats	Total
Variable overhead cost = Predetermined variable overhead rate * Machine-hours used by each	112.14 * 10000 =1121400	112.14*16000 =1794240	112.14*24000 =2691360	$56,07,000

.

b. Complete the income statement using the bases recommended by the consultant

.

PICKLE MOTORCYCLES, INC. Income Statement

	Route 66	Main Streets	Alley Cats	Total
Sales revenue	7,600,000	12,100,000	9,300,000	$29,000,000
Direct costs
Direct materials	3300000	4800000	3900000	12000000
Direct labor	281000	478000	1030000	1789000
Variable overhead	1243000	1716000	2648000	$56,07,000
Contribution margin	$27,76,000	$51,06,000	$17,22,000	$96,04,000
Fixed overhead
Plant administration				1740000
Other fixed overhead				2840000
Gross profit				$50,24,000

.

PMI's chief financial officer (CFO) hired a consultant to recommend cost allocation bases. The consultant recommended the following:

.	.	Activity Level	.
Activity	Cost Driver	Route 66	Main Street	Alley Cat	Total
Setting up machines	Number of production runs	25	30	40	95
Processing orders	Number of sales orders received	500	700	600	1800
Warehousing	Number of units held in inventory	220	240	420	880
Using energy	Machine-hours	10,000	16,000	24,000	50000
Shipping	Number of units shipped	800	3,800	12,000	16600

.

Activity	cost	Total Activity level	Rate per activity = cost / Total Activity level	Route 66 = Rate per activity * each activity level used by the	Main Streets = Rate per activity * each activity level used by the	Alley Cats = Rate per activity * each activity level used by the
Machine setup	475,000	95	475000/95 =5000	5000*25 =125000	5000*30 = 150000	5000*40 =200000
Order processing	1,440,000	1800	800	400000	560000	480000
Warehousing costs	2,112,000	880	2400	528000	576000	1008000
Energy to run machines	750,000	50000	15	150000	240000	360000
Shipping	830,000	16600	50	40000	190000	600000
Total variable cost	$56,07,000			1243000	1716000	2648000

.

c. How might activity-based costing result in better decisions by Pickle Motorcycles's management?

• The activity-based costing method provides a more detailed breakdown of the costs.
• The activity-based costing method provides a consolidated summary of the costs.