Question

Koontz Company manufactures two models of industrial components—a Basic model and an Advanced Model. The company considers all of its manufacturing overhead costs to be fixed and it uses plantwide manufacturing overhead cost allocation based on direct labor-hours. Koontz’s controller prepared the segmented income statement that is shown below for the most recent year (he allocated selling and administrative expenses to products based on sales dollars):

Basic Advanced Total

Number of units produced and sold 20,000  10,000 30,000

        

Sales$3,000,000 $2,000,000$5,000,000

Cost of goods sold 2,300,000  1,350,000 3,650,000

Gross margin 700,000  650,000 1,350,000

Selling and administrative expenses 720,000  480,000 1,200,000

Net operating income (loss)$(20,000)$170,000$150,000

Direct laborers are paid $20 per hour. Direct materials cost $40 per unit for the Basic model and $60 per unit for the Advanced model. Koontz is considering a change from plantwide overhead allocation to a departmental approach. The overhead costs in the company’s Molding Department would be allocated based on machine-hours and the overhead costs in its Assembly and Pack Department would be allocated based on direct labor-hours. To enable further analysis, the controller gathered the following information:

Molding Assemble and Pack Total

Manufacturing overhead costs$787,500 $562,500$1,350,000

Direct labor hours:       

Basic 10,000  20,000 30,000

Advanced 5,000  10,000 15,000

Machine hours:       

Basic 12,000  - 12,000

Advanced 10,000  - 10,000

Required:

2. Using a departmental approach:

c. Using your departmental overhead cost allocations, redo the controller’s segmented income statement (continue to allocate selling and administrative expenses based on sales dollars).

3. Koontz’s production manager has suggested using activity-based costing instead of either the plantwide or departmental approaches. To facilitate the necessary calculations, she assigned the company’s total manufacturing overhead cost to five activity cost pools as follows:

Activity Cost PoolActivity MeasureManufacturing Overhead

MachiningMachine-hours in Molding$417,500

Assemble and packDirect labor hours in Assemble and Pack 282,500

Order processingNumber of customer orders 230,000

SetupsSetup hours 340,000

Other (unused capacity)  80,000

  $1,350,000

She also determined that the average order size for the Basic and Advanced models is 400 units and 50 units, respectively. The molding machines require a setup for each order. One setup hour is required for each customer order of the Basic model and three hours are required to setup for an order of the Advanced model.

The company pays a sales commissions of 5% for the Basic model and 10% for the Advanced model. Its traceable fixed advertising costs include $150,000 for the Basic model and $200,000 for the Advanced model. The remainder of the company’s selling and administrative costs are organization-sustaining in nature.

Using the additional information provided by the production manager, calculate:

a. An activity rate for each activity cost pool.

b. The total manufacturing overhead cost allocated to the Basic model and the Advanced model using the activity-based approach.

c. The total selling and administrative cost traced to the Basic model and the Advanced model using the activity-based approach.

4. Using your activity-based cost assignments from requirement 3, prepare a contribution format segmented income statement that is adapted from Exhibit 7-8. (Hint: Organize all of the company’s costs into three categories: variable expenses, traceable fixed expenses, and common fixed expenses.)

5. Using your contribution format segmented income statement from requirement 4, calculate the break-even point in dollar sales for the Advanced model.

Answer 1

4:

Contribution format Income statement using activity based costing
						Basic	Advanced	Total
		Number of units produced & sold		20000	10000	30000
		Sales				3000000	2000000	5000000
		Variable costs
		Direct Material				800000	600000	1400000
		Direct labor				600000	300000	900000
		Selling commission			150000	200000	350000
		Total variable costs			1550000	1100000	2650000
		Contribution margin			1450000	900000	2350000
		Contribution ratio			48.33333	45
		Traceble fixed cost
		Manufacturing overhead			488214.5	781785.5	1270000
		Advertising cost			150000	200000	350000
		Total traceble fixed cost			638214.5	981785.5	1620000
		Common fixed costs
		Manufacturing overhead-other for unused capacity		80000
		Selling & adminstrative expenses				500000
		Net operating Income			811785.5	-81785.5	150000

5:

      Breakeven point in dollars for advanced model = total fixed cost / Contribution ratio

                                                                                   =981785.5/45%

                                                                                 = 2181745.556

     Feel free to ask any clarification if required. Please provide feedback by thumbs up if satisfied. It will be highly appreciated. Thank you.