Question

Kingston Company produces precision components. Kingston has 2 customer groups. One group, with 4 large customers, accounts for 60 percent of the sales. The remaining group, consisting of 20 small customers, accounts for the rest of the sales. Data for Q1 2020 concerning Kingston's customer group activity follow:

Customer Group	Large Customers Group	Small Customers Group
Units purchased	300,000	200,000
Sales revenue	$1,800,000	$1,200,000
Manufacturing costs	$900,000	$600,000
Orders placed	12	420
Number of sales calls	20	230

Q1 indirect costs consist of order-filling costs of $360,000 and sales-force costs of $300,000.

Kingston defines Group Profit = Sales revenue – Manufacturing costs – indirect costs

Required:

1. Allocate the indirect costs to the customer groups based on sales revenue. This represents a traditional allocation approach. Determine the group profit of each of the two groups of customers.
2. Allocate the indirect costs to the customer groups using an activity-based costing approach. Order-filling costs should be allocated based on orders placed and sales force costs allocated based on number of sales calls. Determine the group profit of each of the two groups of customers.
3. Briefly compare the results of the two alternatives. Which method of allocation provides a better assessment of actual performance?

Answer 1

C: Comparison of Group Profit

	Large Customers	Small Customers
Traditional Approach	$ 504,000	$ 336,000
ABC Approach	$ 866,000	-$26,000
Difference	- $382,000	$ 382,000

ABC Approach is a better approach as compared to traditional because it helps to allcoate the indirect cost based on the actual consumption of activity and not on a factory wide overhead rate.

Notes:

1. Be careful while reading numbers (with commas).
2. If you have any doubt, feel free to ask in comment section.