Koontz Company manufactures two models of industrial components—a Basic model an
ID: 2394561 • Letter: K
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):
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:
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:
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.)
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.)
Calculate the total selling and administrative cost traced to the Basic model and the Advanced model using the activity-based approach.
Using your activity-based cost assignments from requirement 3, prepare a contribution format segmented income statement. (Round your intermediate calculations to 2 decimal places.)
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 $ 150,000Explanation / Answer
Requirement-a Activity cost pool Activity measure Total cost driver quantity Total overhead amount Basic Advanced Machining Machine hours in moulding 22000 $12,000 $10,000 Amount allocated $417,500 $227,727 $189,773 Assemble and pack Direct labor hours in assembly and packing 30000 $20,000 $10,000 Amount allocated $282,500 $188,333 $94,167 Order processing Number of customer orders $250 $50 $200 Amount allocated $230,000 $46,000 $184,000 Setups Setup hours $650 $50 $600 Amount allocated $340,000 $26,154 $313,846 Requirment b Total manufacturing overhead cost allocated to $1,270,000.00 $488,214.50 $781,785.50 Requirement c Total selling & administrative cost traced to Sales commissions $150,000.00 $200,000.00 Fixed advertising costs $150,000.00 $200,000.00 Total $300,000.00 $400,000.00 Requirement 4: Contribution format Income statement using activity based costing ` Basic Advanced Total Number of units produced & sold 20,000.00 10,000.00 30,000.00 Sales $3,000,000 $2,000,000 $5,000,000 Variable costs Direct Material $800,000 $600,000 $1,400,000 Direct labor $600,000 $300,000 $900,000 Selling commission $150,000 $200,000 $350,000 Total variable costs $1,550,000 $1,100,000 $2,650,000 Contribution margin $1,450,000 $900,000 $2,350,000 Contribution ratio $48 $45 Traceble fixed cost Manufacturing overhead $488,215 $781,786 $1,270,000 Advertising cost $150,000 $200,000 $350,000 Total traceble fixed cost $638,215 $981,786 $1,620,000 Common fixed costs Manufacturing overhead-other for unused capacity $80,000 Selling & adminstrative expenses $500,000 Net operating Income $811,786 -$81,786 $150,000
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