Question

Cancico Communications has supplied the following data for use in its ABC system:

Overhead Costs
Wages and salaries	$	267,500
Other overhead costs		152,000
Total overhead costs	$	419,500

Activity Cost Pool	Activity Measure	Total Activity
Direct labour support	Number of direct labour-hours	7,630	DLHs
Order processing	Number of orders	450	orders
Customer support	Number of customers	110	customers
Other	These costs are not allocated      to products or customers	NA

	Distribution of Resource Consumption across Activity Cost Pools
	Direct Labour Support			Order Processing			Customer Support			Other			Total
Wages and salaries		20	%		35	%		30	%		15	%		100	%
Other overhead costs		15	%		25	%		25	%		35	%		100	%

During the year, Cancico Communications completed an order for special telephone equipment for a new customer, HurnTel. This customer did not order any other products during the year. Data concerning that order follow:

Selling price	$	224	per unit
Units ordered		125	units
Direct materials	$	197	per unit
Direct labour-hours		0.6	DLH per unit
Direct labour rate	$	24	per DLH

Required:

1. Prepare a report showing the first-stage allocations of overhead costs to the activity cost pools.

2. Compute the activity rates for the activity cost pools. (Round your answers to 2 decimal places.)

3. Prepare a report showing the overhead costs for the order from HurnTel, including customer support costs. (Round your answers to 2 decimal places.)

4. Prepare a report showing the customer margin for HurnTel. (Round your answers to 2 decimal places.)

Answer 1

Answer -

1. Answer -

	Direct labor support	Order processing	Customer support	Other	Total
Wages and salaries	$53500	$93625	$80250	$40125	$267500
Other overhead costs	$22800	$38000	$38000	$53200	$152000
Total cost	$76300	$131625	$118250	$93325	$419500

Calculation:

a. Direct labor support:

Direct labor support is 20% of wages and salaries

= 20% * $267500

= $53500

Direct labor support is 15% of other overhead cost

= 15% * $152000

= $22800

Total direct labor support cost = $53500 + $22800 = $76300

b. Order processing:

Order processing is 35% of wages and salaries

= 35% * $267500

= $93625

Order processing is 25% of other overhead cost

= 25% * $152000

= $38000

Total order processing cost = $93625 + $38000 = $131625

c. Customer support:

Customer support is 30% of wages and salaries

= 30% * $267500

= $80250

Customer support is 25% of other overhead cost

= 25% * $152000

= $38000

Total customer support cost = $80250 + $38000 = $118250

d. Other:

Other cost is 15% of wages and salaries

= 15% * $267500

= $40125

Other cost is 35% of other overhead cost

= 35% * $152000

= $53200

Total other cost = $53200 + $40125 = $93325

2. Answer -

Activity cost pools	Activity rate:
Direct labor support	$10	per DLH
Order processing	$292.50	per order
Customer support	$1075	per customer

Calculation:

a. Direct labor support:

Activity rate:

= Total activity pool cost / Total activity

= $76300 / 7630 DLHs

= $10 per DLH

b. Order processing:

Activity rate:

= Total activity pool cost / Total activity

= $131625 / 450 orders

= $292.50 per order

c. Customer support:

Activity rate:

= Total activity pool cost / Total activity

= $118250 / 110 customers

= $1075

3. Answer -

Activity cost pool	Activity rate:		Activity		ABC cost
Direct labor support	$10	per DLH	75	DLHs	$750
Order processing	$292.5	per order	1	orders	$292.50
Customer support	$1075	per customer	1	customer	$1075
Total					$2117.50

Calculation:

Customer HurnTel ordered 125 units

So, direct labor support activity for 125 units

= Units order * Direct labor hours

= 125 units * 0.6 DLHs per unit

= 75 DLHs

a. Direct labor support:

ABC cost = Activity rate * Activity

= $10 * 75 DLHs

= $750

b. Order processing:

ABC cost = Activity rate * Activity

= $292.50 * 1 order

= $292.50

c. Customer support:

ABC cost = Activity rate * Activity

= $1075 * 1 customer

= $1075

4. Answer -

Hurn Tel
Customer Margin-ABC Analysis
Sales		$28000
Costs:
Direct materials	$24625
Direct labor	$1800
Direct labor support overhead	$750
Order processing overhead	$292.50
Customer support overhead	$1075	$28543
Customer margin		-$542.50

Calculation:

a. Sales:

= Units ordered * Selling price per unit

= 125 units * $224 per unit

= $28000

b. Direct materials:

= Units ordered * Direct materials cost per unit

= 125 units * $197 per unit

= $24625

c. Direct labor:

= Units ordered * Direct labor hour per unit * Direct labor cost per DLH

= 125 units * 0.6 DLH per unit * $24 per DLH

= $1800

d. Customer margin:

= Sales - (Direct materials + Direct labor + Direct labor support overhead + Order processing overhead + Customer support overhead)

= $28000 - ($24625 + $1800 + $750 + $292.50 + $1075)

= -$542.50