Question
In: Accounting
Koontz Company manufactures two models of industrial components—a Basic model and an Advanced Model. The company...
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 Pool | Activity Measure | Manufacturing Overhead | ||
| Machining | Machine-hours in Molding | $ | 417,500 | |
| Assemble and pack | Direct labor hours in Assemble and Pack | 282,500 | ||
| Order processing | Number of customer orders | 230,000 | ||
| Setups | Setup 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.
Solutions
Expert Solution
| Basic | Advanced | |||||||
| Particulars | Total Cost | Basis | Basis used | Total Exp | Per Unit | Basis used | Total Exp | Per Unit |
| No. of Units Sold | 20,000 | 10,000 | ||||||
| Machining - Machine Hours Molding | $ 4,17,500.00 | 22,000 | 12,000 | $ 2,27,727.27 | $ 11.39 | 10,000 | $ 1,89,772.73 | $ 18.98 |
| Assembling & Packing - Labour Hours | $ 2,82,500.00 | 30,000 | 20,000 | $ 1,88,333.33 | $ 9.42 | 10,000 | $ 94,166.67 | $ 9.42 |
| Order Processing | $ 2,30,000.00 | 250 | 50 | $ 46,000.00 | $ 2.30 | 200 | $ 1,84,000.00 | $ 18.40 |
| Setup - Setup Hours | $ 3,40,000.00 | 650 | 50 | $ 26,153.85 | $ 1.31 | 600 | $ 3,13,846.15 | $ 31.38 |
| $ 12,70,000.00 | $4,88,214.45 | $ 24.41 | $7,81,785.55 | $ 78.18 | ||||
| Particulars | Basic | Advanced | Total | |||||
| Sales | $ 30,00,000 | $ 20,00,000 | $ 50,00,000 | |||||
| Commission Percentage | 5% | 10% | ||||||
| Sales Commission | $ 1,50,000 | $ 2,00,000 | $ 3,50,000 | |||||
| Fixed Advertising Costs | $ 1,50,000 | $ 2,00,000 | $ 3,50,000 | |||||
| Departmental S& A Expenses | $ 3,00,000 | $ 4,00,000 | $ 7,00,000 | |||||
| Total S&A Expense | $ 12,00,000 | |||||||
| Organization Sustaining S&A | $ 5,00,000 | |||||||
| Question -4 | ||||||||
| Income Statement | ||||||||
| Particulars | Basic | Advanced | Organization | |||||
| Sales | $ 30,00,000 | $ 20,00,000 | $ 50,00,000 | |||||
| Less: Variable Costs | ||||||||
| Material | $ 8,00,000 | $ 6,00,000 | $ 14,00,000 | |||||
| Direct Labour | $ 2,00,000 | $ 1,00,000 | $ 3,00,000 | |||||
| Manufacturing O.H | $ 4,88,214 | 781785.5478 | $ 12,70,000 | |||||
| Variable Selling Expenses | $ 1,50,000 | $ 2,00,000 | $ 3,50,000 | |||||
| Contribution | $ 13,61,786 | $ 3,18,214 | $ 16,80,000 | |||||
| Less: Tracable Fixed Expenses | ||||||||
| Fixed Advertising Costs | $ 1,50,000 | $ 2,00,000 | $ 3,50,000 | |||||
| Operating Income | $ 12,11,786 | $ 1,18,214 | $ 13,30,000 | |||||
| Less: Common Fixed Expenses | ||||||||
| Other Manufacturing O.H | $ 80,000 | |||||||
| Fixed Manufacturing O.H | $ 6,00,000 | |||||||
| Organization Sustaining S&A | $ 5,00,000 | |||||||
| Net Income | $ 1,50,000 | |||||||
 ekkarill92 answered 1 year agoRelated SolutionsKoontz Company manufactures two models of industrial components—a Basic model and an Advanced Model. The company...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):
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Koontz Company manufactures two models of industrial components—a Basic model and an Advanced Model. The company...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
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Number of units produced and sold
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10,000
30,000
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Koontz Company manufactures two models of industrial components—a Basic model and an Advanced Model. The company...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
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10,000
30,000
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Koontz Company manufactures two models of industrial components—a Basic model and an Advanced Model. The company...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
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30,000
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Koontz Company manufactures two models of industrial components—a Basic model and an Advanced Model. The company...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
$...
Koontz Company manufactures two models of industrial components—a Basic model and an Advanced Model. The company...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
$...
Koontz Company manufactures two models of industrial components—a Basic model and an Advanced Model. The company...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
$...
Koontz Company manufactures two models of industrial components—a Basic model and an Advanced Model. The company...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
$...
Koontz Company manufactures two models of industrial components—a Basic model and an Advanced Model. The company...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
$...
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