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
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.

Calculate an activity rate for each activity cost pool. (Round your answers to 2 decimal places.)

	Activity Cost Pool Activity Rate Machining per MH Assemble and pack per DLH Order processing per order Setups per hour

Calculate the total manufacturing overhead cost allocated to the Basic model and the Advanced model using the activity-based approach. (Round your intermediate calculations to 2 decimal places.)

	Basic Advanced Machining Assemble and pack Order processing Setups Total overhead cost assigned $0 $0

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

	Basic Advanced Total traceable selling and administrative cost

Using your activity-based cost assignments from requirement 3, prepare a contribution format segmented income statement. (Round your intermediate calculations to 2 decimal places.)

	Koontz Company Income statement Total Basic Advanced Variable expenses: Total variable expenses 0 0 0 0 Traceable fixed expenses: Total traceable fixed expenses 0 0 Segment margin $0 $0 Common fixed expenses: Total common fixed expenses 0 $0

Answer 1