Question

Allocating Selling and Administrative Expenses using Activity-Based Costing

Arctic Air Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows:

Price	$60,000	per unit
Cost of goods sold	(28,000)
Gross profit	$32,000	per unit

In addition, the company incurs selling and administrative expenses of $226,250. The company wishes to assign these costs to its three major customers, Gough Industries, Breen Inc., and The Martin Group. 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		Budgeted Activity Cost				Activity Base
Customer service			$31,500			Number of service requests
Project bidding			74,000			Number of bids
Engineering support			120,750			Number of customer design changes
	Total activity cost		$226,250

Activity-base usage and unit volume information for the three customers is as follows:

	Gough Industries			Breen Inc.		The Martin Group		Total
Number of service requests	36			28		116		180
Number of bids	50			40		95		185
Number of customer design changes	18			35		108		161
Unit volume	30			16		4		50

Required:

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

	Activity Rate
Customer Service	$ per serv. req.
Project Bidding	$ per bid
Engineering Support	$ per design changes

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

	Activity Costs
Gough Industries	$
Breen Inc.	$
The Martin Group	$

3. 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.

Arctic Air Inc.
Customer Profitability Report
For the Year Ended December 31
	Gough Industries	Breen Inc.	The Martin Group
Revenues	$	$	$
Cost of goods sold
Gross profit	$	$	$
Selling and administrative activities:
Customer service	$	$	$
Project bidding
Engineering support
Total selling and administrative activities	$	$	$
Operating income (loss)	$	$	$

Answer 1

Activity Rate = Overhead Costs/Total Driver
Overhead	Activity Rate
Customer Service = 31500/180	175	per service req
Project Bidding = 74000/185	400	per bid
Engineering Support 120750/161	750	per design change
Activity cost allocated = Driver consumed*Activity Rate
	Activity Costs
Gough Industries = 36*175 + 50*400 + 18*750	39,800
Breen Inc.	47,150
The Martin Group	139,300
Arctic Air Inc.
Customer Profitability Report
For the Year Ended December 31
	Gough Industries	Breen Inc.	The Martin Group
Revenues	1,800,000	960,000	240,000
Cost of goods sold	840,000	448,000	112,000
Gross profit	960,000	512,000	128,000
Selling and administrative activities:
Customer service	6,300	4,900	20,300
Project bidding	20,000	16,000	38,000
Engineering support	13,500	26,250	81,000
Total selling and administrative activities	39,800	47,150	139,300
Operating income (loss)	920,200	464,850	(11,300)