EXERCISES
Ex. 26–1 (FIN MAN); Ex. 11–1 (MAN)
($215,000/4,000) × 2,200 = $118,250
Ex. 26–2 (FIN MAN); Ex. 11–2 (MAN)
a. Single Plantwide Factory Overhead Rate =
$139,500
2,250 direct labor hours*
= $62 per direct labor hour
*Total direct labor hours:
Budgeted Production
Volume
×
Trumpets ........
Tubas ..............
Trombones .....
Total ................
1,400 units
400
900
Direct Labor
Hours per Unit
=
0.5
1.4
1.1
=
=
=
×
×
×
Direct Labor
Hours
700
560
990
2,250
b.
Single PlantDirect
wide Rate
Labor
per Direct
Factory
Hours × Labor Hour = Overhead
Trumpets .... 700 ×
Tubas .......... 560 ×
Trombones . 990 ×
Total ............ 2,250
$62
62
62
Factory Overhead per Unit
(Factory Overhead ÷ Budgeted Production Volume)
= $ 43,400 $43,400 ÷ 1,400 units = $31.00
=
34,720 $34,720 ÷ 400 units = $86.80
=
61,380 $61,380 ÷ 900 units = $68.20
$139,500
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Ex. 26–3 (FIN MAN); Ex. 11–3 (MAN)
a. Single Plantwide Factory Overhead Rate =
$55,200*
920 processing hours
= $60 per processing hour
*$82,800 $9,600 $18,000
The selling and administrative expenses are not factory overhead.
*Total processing hours:
Budgeted Production
Volume
(Cases)
×
Tortilla chips ..
Potato chips ...
Pretzels ...........
Total ................
2,500
4,400
1,200
8,100
Processing
Hours per Case
=
0.12
0.10
0.15
=
=
=
×
×
×
Processing
Hours
300
440
180
920
b.
Single Plantwide
Factory OverProcessing
head Rate per
Factory
Hours × Processing Hour = Overhead
Tortilla chips
Potato chips ..
Pretzels ..........
Total ...............
300
440
180
920
×
×
×
$60
60
60
=
=
=
Factory Overhead per Case
(Factory Overhead ÷ Budgeted Production Volume)
$18,000 $18,000 ÷ 2,500 cases = $7.20
26,400 $26,400 ÷ 4,400 cases = $6.00
10,800 $10,800 ÷ 1,200 cases = $9.00
$55,200
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Ex. 26–4 (FIN MAN); Ex. 11–4 (MAN)
a. First, determine the total estimated labor hours consumed by the three products:
Direct Labor
Total Labor
Volume × Hours per Unit =
Hours
Pistons .......................................
6,000
×
0.15
Valves ........................................ 24,000
×
0.10
Cams ..........................................
1,000
×
0.30
Total estimated direct labor hours .............................................
=
=
=
900
2,400
300
3,600
Next, determine the plantwide overhead rate:
Budgeted Factory Overhead
Plantwide Allocation Base
b.
Direct
Labor Hours
per Unit
Pistons ............
Valves .............
Cams ...............
c.
=
$108,000
= $30.00 per dlh
3,600 direct labor hours
Factory Overhead Cost
per Unit ($30.00 × Direct
Labor Hours per Unit)
0.15
0.10
0.30
Direct Labor Cost
per Unit ($25 × Direct
Labor Hours per Unit)
$4.50
3.00
9.00
$3.75
2.50
7.50
FLINT ENGINE PARTS INC.
Product Line Budgeted Gross Profit Reports
For the Year Ended December 31, 2012
Pistons
Valves
Cams
$252,000
$204,000
$56,000
$123,000
$ 78,000
$24,000
22,500
60,000
7,500
27,000
$172,500
72,000
$210,000
9,000
$40,500
Gross profit ....................................................
$ 79,500
$ (6,000)
$15,500
Gross profit percentage of sales ..................
31.5%
–2.9%
27.7%
Revenues (price × unit volume) ....................
Direct materials (direct materials cost
per unit × unit volume) ..............................
Direct labor [direct labor cost per
unit (b) × unit volume] ...............................
Factory overhead [factory overhead
cost per unit (b) × unit volume] ................
d. Valves have the lowest (and negative) gross profit as a percent of sales.
Valves may require a higher price or lower cost to manufacture in order to
achieve the same profitability as the other two products.
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Ex. 26–5 (FIN MAN); Ex. 11–5 (MAN)
a. Production department factory overhead rates:
Total factory overhead .............................
Direct labor hours .....................................
Departmental overhead rate ....................
Pattern
Department
Cut and Sew
Department
$ 140,000
÷ 2,000 dlh
$ 70.00/dlh
$207,000
÷ 2,300 dlh
$ 90.00 /dlh
b. Product cost allocation:
Small Glove
Pattern Department
Cut and Sew Department
Total factory overhead per
small glove
0.05 dir. labor hr.× $70/dlh
0.07 dir. labor hr.× $90/dlh
=
=
$3.50
6.30
$9.80
Medium Glove
Pattern Department
Testing Department
Total factory overhead per
medium glove
0.06 dir. labor hr.× $70/dlh
0.09 dir. labor hr.× $90/dlh
=
=
$ 4.20
8.10
$12.30
Large Glove
Pattern Department
Testing Department
Total factory overhead per
large glove
0.07 dir. labor hr.× $70/dlh
0.11 dir. labor hr.× $90/dlh
=
=
$ 4.90
9.90
$14.80
Ex. 26–6 (FIN MAN); Ex. 11–6 (MAN)
a. Plantwide factory overhead rate:
Budgeted Factory Overhead
Plantwide Allocation Base
=
$810, 000
= $90.00 per dmh
9, 000 direct machine hours
Product costs:
Desktop
Portable
$90 per dir. mach. hr. ×
$90 per dir. mach. hr. ×
1.5 dmh
3.0 dmh
=
=
$135
$270
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Ex. 26–6 (FIN MAN); Ex. 11–6 (MAN)
(Concluded)
b. Department factory overhead rates:
Production department overhead ...........
Direct machine hours ...............................
Production department overhead rate ....
Assembly
Department
Testing
Department
$ 210,000
÷ 3,000 dmh
$ 70.00/dmh
$600,000
÷ 6,000 dmh
$ 100.00/dmh
Product cost allocation:
Desktop
Assembly Department
Cut and Sew Department
Total factory overhead per
desktop
0.5 dir. mach. hr.
1.0 dir. mach. hr.
× $70/dmh
× $100/dmh
= $ 35
= 100
$135
Portable
Assembly Department
Cut and Sew Department
Total factory overhead per
portable
1.0 dir. mach. hr.
× $70/dmh
2.0 dir. mach. hrs. × $100/dmh
= $ 70
= 200
$270
c. The factory overhead determined under the single plantwide factory overhead
rate and multiple production department factory overhead rate methods are
the same. This is because the ratio of direct machine hours used by each
product from the two departments is the same. The desktop machine uses
0.50 direct machine hour in the Assembly Department and 1.00 hour in the
Testing Department, or a ratio of 1:2. The portable computer uses 1.00 direct
machine hour in the Assembly Department and 2.00 hours in the Testing
Department, also for a ratio of 1:2. Thus, even though the two production department overhead rates are different, this is not sufficient for the plantwide
rate to cause product cost distortion. Thus, Peach should consider remaining
with the easier single plantwide rate method in this circumstance.
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Ex. 26–7 (FIN MAN); Ex. 11–7 (MAN)
a. Plantwide factory overhead rate:
Budgeted Factory Overhead
Plantwide Allocation Base
=
$800,000
= $125 per dlh
6,400 direct labor hours
Product costs:
Gasoline engine
Diesel engine
$125 per dir. labor hr. × 3 dlh = $375
$125 per dir. labor hr. × 3 dlh = $375
b. Department factory overhead rates:
Total production department factory
overhead ....................................................
Direct labor hours ........................................
Production department overhead rate .......
Fabrication
Department
Assembly
Department
$576,000
÷ 3,200 dlh
$
180/dlh
$224,000
÷ 3,200 dlh
$
70/dlh
Product cost allocation:
Gasoline engine
Fabrication Department
Assembly Department
Total factory overhead per
gasoline engine
0.8 dir. labor hr. × $180/dlh
2.2 dir. labor hrs. × $70/dlh
=
=
$144
154
$298
Diesel engine
Fabrication Department
Assembly Department
Total factory overhead per
diesel engine
2.2 dir. labor hrs. × $180/dlh
0.8 dir. labor hr. × $70/dlh
=
=
$396
56
$452
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Ex. 26–7 (FIN MAN); Ex. 11–7 (MAN)
(Concluded)
c. Management should select the multiple department factory overhead rate
method of allocating overhead costs. The single plantwide factory overhead
rate method indicates that both products have the same factory overhead of
$375 per unit. This is because each product uses a total of 3 direct labor
hours per unit. However, each product uses these 3 direct labor hours much
differently. The gasoline engine consumes 0.8 hour in the expensive Fabrication Department and 2.2 hours in the less expensive Assembly Department.
The opposite is the case for diesel engines. Thus, the multiple production
department rate method avoids the cost distortions of the single plantwide
rate method by accounting for the overhead in each production department
separately. In this case, there are both production department rate differences
across the departments and differences in the ratios of allocation-base usage
of the products across the departments (0.8:2.2 vs. 2.2:0.8). These conditions
will cause the single plantwide rate method to distort product costs.
Ex. 26–8 (FIN MAN); Ex. 11–8 (MAN)
Activity
Accounting reports
Customer return processing
Electric power
Human resources
Inventory control
Invoice and collecting
Machine depreciation
Materials handling
Order shipping
Payroll
Production control
Production setup
Purchasing
Quality control
Sales order processes
Activity Base
Number of accounting reports
Number of customer returns
Kilowatt hours used
Number of employees
Number of inventory transactions
Number of customer orders
Number of machine hours
Number of material moves
Number of customer orders
Number of payroll checks processed
Number of production orders
Number of setups
Number of purchase orders
Number of inspections
Number of sales orders
Ex. 26–9 (FIN MAN); Ex. 11–9 (MAN)
a. Sales order processing activity rate: $78,300 ÷ 4,350 sales orders = $18 per
sales order
b. China sales order processing cost: $18 × 1,790 sales orders = $32,220
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Ex. 26–10 (FIN MAN); Ex. 11–10 (MAN)
A
B
1
2
Activity
3
4
5
6
Fabrication
Assembly
Setup
Inspecting
Production
7
scheduling
Purchasing
8
C
Stationary Bicycle
D
E
ActivityBase
Activity
Activity
Usage ×
Rate
= Cost
1,750 mh
$24/mh
$42,000
450 dlh
$10/dlh
4,500
49 setups
$50/setup
2,450
320 insp.
$24/insp.
7,680
60 prod.
$11/
orders
prod. ord.
660
190
$9/
purch. ord. purch. ord.
1,710
9 Total
10 Number of units
11 Activity cost per unit
F
Treadmill
G
ActivityBase
Activity
Activity
Usage ×
Rate
= Cost
965 mh
$24/mh
$23,160
156 dlh
$10/dlh
1,560
15 setups
$50/setup
750
310 insp.
$24/insp.
7,440
10 prod.
$11/
orders
prod. ord.
110
100
$9/
purch. ord. purch. ord.
900
$59,000
÷ 500
$ 118
$33,920
÷ 160
$
212
Ex. 26–11 (FIN MAN); Ex. 11–11 (MAN)
a.
A
1
Activity
2 Casting
3 Assembly
4 Inspecting
Setup
5
Materials
6
handling
B
Budgeted
Activity
Cost ÷
$106,400
52,800
17,080
33,600
35,700
C
D
Total
ActivityActivity
Base
= Rate
3,800 mh
$28 mh
3,300 dlh
$16 dlh
1,220 insp. $14/insp.
240
$140/setup
setups
850
$42/load
loads
b.
A
1
2
Activity
3 Casting
4 Assembly
5 Inspecting
Setup
6
B
C
D
Entry Lighting Fixtures
ActivityBase
Activity
Activity
Usage ×
Rate
= Cost
2,600 mh
$28 mh
$72,800
1,000 dlh
$16 dlh
16,000
900 insp.
$14/insp.
12,600
180
setups
$140/setup
25,200
Materials
handling
600 loads
8 Total activity cost
9 Number of units
10 Activity cost per unit
7
$42/load
25,200
$151,800
÷ 7,500
$ 20.24
E
F
G
Dining Room Lighting Fixtures
ActivityBase
Activity
Activity
Usage ×
Rate
= Cost
1,200 mh
$28 mh
$33,600
2,300 dlh
$16 dlh
36,800
320 insp.
$14/insp.
4,480
60
setups
$140/setup
8,400
250
loads
$42/load
10,500
$93,780
÷ 3,000
$ 31.26
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Ex. 26–12 (FIN MAN); Ex. 11–12 (MAN)
a.
A
1
2 Factory overhead
3 Activity base
4 Activity rate
B
C
Procurement
Scheduling
$ 121,000
$ 8,140
÷ 1,100 purch. ords. ÷ 370 prod. ords.
$
110/purch. ord. $
22/prod. ord.
D
Materials
Handling
$21,000
÷ 700 moves
$
30/move
E
Product
Development
$22,440
÷ 170 ECOs
$ 132/ECO
b.
A
B
C
Ovens
1
D
ActivityBase
Activity
Usage ×
Rate
Procurement 700 purch.
$110/purch.
3
orders
order
Scheduling
250 prod.
$22/prod.
4
orders
order
Materials
5
handling
420 moves
$30/move
Product
6
development 120 ECOs
$132/ECO
7 Total
8 Unit volume
9 Activity cost per unit
2
Activity
E
Activity
= Cost
$ 77,000
5,500
12,600
15,840
$110,940
÷ 2,000
$ 55.47
F
Refrigerators
G
ActivityBase
Activity
Activity
Usage ×
Rate
= Cost
400 purch. $110/purch.
orders
order
$ 44,000
120 prod. $22/prod.
orders
order
2,640
280 moves $30/move
50 ECOs
$132/ECO
8,400
6,600
$ 61,640
÷ 1,541
$ 40.00
Ex. 26–13 (FIN MAN); Ex. 11–13 (MAN)
a. Single plantwide rate:
Indirect Labor
$270,000
=
= $90 per direct labor hour
Plantwide Allocation Base
3,000 direct labor hours
Direct Labor
Plantwide
Hours
×
Rate
=
CDs
DVDs
1,500
1,500
×
×
$90/dlh
$90/dlh
=
=
Indirect
Labor Cost
$135,000
$135,000
÷ Units
=
Indirect Labor
Cost per Unit
÷ 75,000 =
÷ 75,000 =
$1.80
$1.80
b. Activity-based rates:
Budgeted activity cost* .......
Activity base.........................
Activity rate ..........................
Setup
$ 108,000
÷ 1,600 setups
$ 67.50/setup
Production Support
$ 162,000
÷
3,000 dlh
$
54/dlh
*Setup activity cost = $270,000 × 40% = $108,000
Production support activity cost = $270,000 × 60% = $162,000
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Ex. 26–13 (FIN MAN); Ex. 11–13 (MAN)
(Concluded)
c.
A
B
1
2
Activity
ActivityBase
Usage ×
500 setups
3 Setup
Production
4
Support
1,500 dlh
5 Total
6 Units
7 Activity cost per unit
C
CDs
D
Activity
Rate
$67.50/setup
Activity
= Cost
$ 33,750
$54/dlh
81,000
$114,750
÷ 75,000
$
1.53
E
F
DVDs
ActivityBase
Activity
Usage ×
Rate
1,100 setups $67.50/setup
1,500 dlh
$54/dlh
G
Activity
= Cost
$ 74,250
81,000
$155,250
÷ 75,000
$
2.07
d. The per-unit indirect labor costs in (a) are distorted because setup activity is
consumed by the products in a different ratio from the direct labor. CDs required 500 setups over a volume of 75,000 units (or 150 units per production
run), while DVDs required 1,100 setups over the same volume (approximately
68 units per production run). The activity-based costing method properly
allocates the setup-related activity so that the DVDs, the setup-intensive
product, receive a larger portion of the setup activity cost, while the CDs receive a smaller portion. The single rate system allocates overhead only on the
basis of direct labor hours. Since the direct labor hours are equal for each
product, the allocated indirect labor will also be equal. Again, this is clearly a
distortion, since the setup activity (40% of the indirect labor) is not consumed
equally by each product.
515
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Ex. 26–14 (FIN MAN); Ex. 11–14 (MAN)
a. Production department factory overhead rates:
Assembly
Department
Factory overhead .................................................
Direct labor hours ................................................
Production department factory overhead rate ..
$ 108,000
÷ 2,000
$
54/dlh
Test and Pack
Department
$ 70,000
÷ 2,000
$
35/dlh
b.
A
B
Activity
AllocationBase
Usage ×
1
2
Assembly
500 dlh
Department
Test and Pack
4
Department
1,500 dlh
3
5 Total
6 Units
7 Factory overhead cost per unit
C
Blender
D
E
F
Toaster Oven
G
Activity
Rate
Activity
= Cost
AllocationBase
Usage ×
Activity
Rate
Activity
= Cost
$54/dlh
$27,000
1,500 dlh
$54/dlh
$81,000
$35/dlh
52,500
500 dlh
$35/dlh
17,500
$79,500
÷ 5,000
$ 15.90
$98,500
÷ 5,000
$ 19.70
516
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Ex. 26–15 (FIN MAN); Ex. 11–15 (MAN)
a. Activity rates:
Assembly
Activity
Budgeted activity cost
Activity base................
Activity rate .................
1
2
Test and Pack
Activity
Setup
Activity
$ 13,0002
÷ 2,000 dlh
$ 6.50/dlh
$114,000
÷
150 setups
$
760/setup
$ 51,0001
÷ 2,000 dlh
$ 25.50/dlh
$108,000 $57,000
$70,000 $57,000
b. Product factory overhead costs:
A
B
1
2
3
4
5
6
7
8
Activity
ActivityBase
Usage ×
C
Blender
Activity
Rate
D
Activity
= Cost
Assembly
activity
500 dlh
$25.50/dlh
Test and pack
activity
1,500 dlh
$6.50/dlh
Setup activity 100 setups
$760/setup
Total
Units
Factory overhead cost per unit
E
ActivityBase
Usage ×
F
Toaster Oven
Activity
Rate
G
=
Activity
Cost
$ 12,750 1,500 dlh
$25.50/dlh
$ 38,250
9,750
76,000
$ 98,500
÷ 5,000
$ 19.70
$6.50/dlh
$760/setup
3,250
38,000
$ 79,500
÷ 5,000
$ 15.90
500 dlh
50 setups
Note to Instructors: If you assigned both Ex. 26–14 and Ex. 26–15, then you
can make the following observations:
The activity-based costing approach provides unit factory overhead cost
information that is opposite to that of the multiple production department factory overhead rate method. The reason is that the multiple production
department factory overhead rate method allocates all factory overhead to the
products on the basis of direct labor hours. However, factory overhead includes the setup activity. Setup activity is consumed by the products in ratios
that are not equal to their direct labor consumption. Indeed, the blender uses
twice as much setup activity as the toaster oven. The activity-based costing
method correctly accounts for this difference, while the multiple production
department factory overhead rate method incorrectly assumes that this activity is equal to both products (proportional to the direct labor hours or volume
of production). Thus, the management of Gourmet Appliance should be
encouraged to use activity-based costing information for product-based
decisions.
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Ex. 26–16 (FIN MAN); Ex. 11–16 (MAN)
a.
Product Volume Class
Low
Medium
High
Column A
Column B
Column C
Single Rate
Overhead
Allocation
per Unit
ABC Overhead
Allocation per
Unit
Percent Change in
Allocation (Col. B –
Col. A)/Col. A
$36.001
36.003
36.005
$68.642
35.734
30.946
90.7%
–0.8%
–14.1%
1
(28 hours × $180/hour)/140 units
[(28 hours × $145/hour) + (15 setups × $220/setup) + (45 sales orders ×
$50/sales order)]/140 units
3
(240 hours × $180/hour)/1,200 units
4
[(240 hours × $145/hour) + (14 setups × $220/setup) + (100 sales orders ×
$50/sales order)]/1,200 units
5
(1,000 hours × $180/hour)/5,000 units
6
[(1,000 hours × $145/hour) + (10 setups × $220/setup + (150 sales orders ×
$50/sales order)]/5,000 units
b. The machine hour rate is greater under the single rate method than under the
activity-based method because all the factory overhead is allocated by
machine hours under the single rate method. However, only a portion of the
factory overhead is allocated under the machine rate method using activitybased costing. The remaining factory overhead is allocated using the other
two activity rates. Thus, the numerator for determining the machine hour rate
under activity-based costing must be less than the numerator under the
single machine hour rate method.
c. Column C indicates that under activity-based costing the low-volume product
has a higher per-unit cost than calculated under the single rate method. In
contrast, under activity-based costing the high-volume product has a lower
per-unit cost than calculated under the single rate method. This result will
occur when there are activities that occur in proportions different from their
volumes. In this case, lower-volume products have setups and sales orders
occurring in higher proportions of total setups and sales orders than their
proportion of machine hours to total machine hours. The opposite is the case
for the high-volume product. Thus, the lower-volume products are produced
and ordered in smaller batch sizes compared to the higher-volume product.
This implies that Whirlpool may wish to simplify its product line by eliminating some of the low-volume products or by attempting to reduce the overall
cost of setup and sales order processing activities.
Note: The sum of the total overhead from Columns A and B is not equal because
there are only three representative products, not all of the products.
2
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Ex. 26–17 (FIN MAN); Ex. 11–17 (MAN)
The selling and administrative expenses should not be allocated on the basis of
relative sales dollars. The two product lines have very different attributes. The
commercial product is relatively inexpensive to sell, while the home product has
a number of additional costs associated with it. As a result, the relative sales
dollar method of allocation will distribute too much selling and administrative
cost to the commercial product and too little to the home product. The commercial product receives twice as much selling and administrative expense as the
home product because it has twice the sales. An activity-based approach would
trace the selling and administrative costs to the products based upon their actual
consumption of activities. Such an allocation would show the commercial
product to be more profitable than indicated and the home product to be less
profitable than indicated.
Ex. 26–18 (FIN MAN); Ex. 11–18 (MAN)
a. Sales order processing activities:
Number of
Sales Orders
Generators ................
Air compressors .......
Total ...........................
870
1,193
×
Activity Rate
=
Activity Cost
×
×
$50
50
=
=
$ 43,500
59,650
$103,150
Activity Rate
=
Activity Cost
=
=
$ 31,500
100,350
$131,850
Post-sale customer service activities:
Number of
Service Requests ×
Generators ................
Air compressors .......
Total ...........................
140
446
×
×
$225
225
Note: $103,150 + $131,850= $235,000, which is the total selling and administrative expense reported in the exercise.
519
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Ex. 26–18 (FIN MAN); Ex. 11–18 (MAN)
(Concluded)
b.
VOLT-GEAR, INC.
Product Profitability Report
For the Year Ended December 31, 2012
Generators
Revenues ...........................................
Cost of goods sold ...........................
Gross profit .......................................
Sales order processing ....................
Post-sale customer service .............
Total selling and administrative
Expense .........................................
Income from operations ...................
Air
Compressors
Total
$1,250,000
900,000
$ 350,000
$ 43,5001
31,5002
$800,000
600,000
$200,000
$ 59,6503
100,3504
$ 2,050,000
1,500,000
$ 550,000
$ 103,150
131,850
$ 75,000
$ 275,000
$160,000
$ 40,000
$ 235,000
$ 315,000
28.00%
25.00%
22.00%
5.00%
Gross profit as a percentage of sales
Income from operations as a
percentage of sales ......................
1
$43,500 = 870 sales orders × $50/sales order
2
$31,500 = 140 service requests × $225/service request
$59,650 = 1,193 sales orders × $50/sales order
3
4
$100,350 = 446 service requests × $225/service request.
c.
The complete product profitability report provides much greater insight than
did the original report. The air compressors have the lower income from
operations to sales percentage because the product is a heavy user of VoltGear’s sales and service activities. The air compressors are ordered in small
quantities (hence a high number of sales orders) and have a high amount of
post-sale service. All of these factors cause the air compressors to have less
income from operations as a percent of sales than generators. In contrast,
relative to the sales volume, the generators have much less activity and thus
have the higher income from operations as a percent of sales. Volt-Gear can
respond to this situation by rationing the amount of service to the air compressor product line, charging air compressor customers for some of the services, reducing the number of service requests by improving the product, or
raising the price on the air compressors.
520
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accessible website, in whole or in part.
Ex. 26–19 (FIN MAN); Ex. 11–19 (MAN)
a.
SCHNEIDER ELECTRIC
Customer Profitability Report
For the Year Ended December 31, 2010
(assumed data)
Customer 1 Customer 2 Customer 3
Revenue ........................................................
Cost of goods sold .......................................
Gross profit...................................................
Customer service activities:
Bid preparation ......................................
Shipment ................................................
Support standard items ........................
Support nonstandard items ..................
Total customer service activities ................
Income from operations after customer
service activities ....................................
Gross profit as a percent of sales .................
Income from operations after customer
service activities as a percent of sales .
$ 32,300
19,380
$ 12,920
$ 21,500
11,180
$ 10,320
$ 26,000
12,480
$ 13,520
$ 2,2001
2522
1,0803
1,3124
$ 4,844
$ 1,320
414
864
2,132
$ 4,730
$ 4,840
756
1,224
4,100
$ 10,920
$ 8,076
$ 5,590
$2,600
40%
48%
52%
25%
26%
10%
Customer service activities are determined by multiplying the activity rate by the
activity usage quantity for each customer. The calculations for Customer 1 are:
1
$220 × 10 bid requests = $2,200
$18 × 14 shipments = $252
3
$24 × 45 standard items = $1,080
4
$82 × 16 nonstandard items = $1,312
2
b. The gross profit as a percent of sales indicated that Customer 1 was the least
profitable, while Customer 3 was the most profitable. After deducting the
activity costs associated with customer service activities, Customer 3 became the least profitable, while Customer 1 became nearly as profitable as
Customer 2. The reason is because Customer 3 consumed much more customer service activities than did either Customer 1 or Customer 2. Apparently,
Customer 3 ordered nonstandard products that required specialized bid requests. In addition, Customer 3 required more shipments, indicating smaller
shipments to a customer’s location, rather than a few large shipments.
521
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accessible website, in whole or in part.
Ex. 26–20 (FIN MAN); Ex. 11–20 (MAN)
a.
A
B
1
2
3
4
5
6
7
8
Activity
Activity
Usage ×
Room and
meals
8 days
Radiology
5 images
Pharmacy
6 orders
Chemistry lab
5 tests
Operating
room
5.5 hrs.
Total cost
C
Patient Barns
Activity
Rate
D
E
Activity
Usage ×
F
Patient Powell
Activity
Rate
Activity
= Cost
$220/day
$290/image
$45/order
$85/test
$1,760
1,450
270
425
$920/hour
5,060
$8,965
Activity
= Cost
3 days
2 images
4 orders
2 tests
$220/day
$290/image
$45/order
$85/test
$ 660
580
180
170
$920/hour
1,380
$2,970
1.5 hrs.
G
b. Patient Barns apparently had a more serious condition than did Patient Powell. Patient Barns required more operating room hours, more tests and images, and more days to recover than did Patient Powell. Thus, the activity
cost to Patient Barns is nearly three times that of Patient Powell.
522
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accessible website, in whole or in part.
Ex. 26–21 (FIN MAN); Ex. 11–21 (MAN)
a.
SAFEGUARD INSURANCE COMPANY
Product Profitability Report
For the Year Ended December 31, 2013
Premium revenue .................................
Less estimated claims .........................
Underwriting income............................
Administrative activities:*
New policy processing ..................
Cancellation processing ...............
Claim audits ...................................
Claim disbursements processing
Premium collection processing....
Total administrative expenses......
Income from operations ......................
Income from operations
as a percent of premium revenue
Auto
$ 4,800,000
3,360,000
$ 1,440,000
$
$
$
Workers’
Comp.
$ 5,200,000
3,640,000
$ 1,560,000
Homeowners
$ 6,800,000
4,760,000
$ 2,040,000
165,000
88,000
128,000
52,000
210,000
643,000
797,000
$ 187,500
44,000
40,000
23,400
45,000
$ 339,900
$ 1,220,100
$
510,000
396,000
320,000
91,000
390,000
$ 1,707,000
$ 333,000
17%
23%
5%
*The activity costs are determined by multiplying the activity rate by the activitybased usage quantity. For example, the administrative activity costs for the Auto
line is as follows:
$165,000 = 1,100 new policies × $150 per new policy
$88,000 = 400 cancellations × $220 per cancellation
$128,000 = 320 audits × $400 per claim audit
$52,000 = 400 disbursements × $130 per disbursement
$210,000 = 7,000 premiums collected × $30 per collection
b. All three insurance lines have the same percentage of underwriting income to
premium revenue (30%). The differences among the insurance lines are in the
way they consume administrative activities. For example, the Homeowners
insurance line has the least profitability due to its high use of administrative
activities. Specifically, the Homeowners line has smaller and more frequent
claims that require more auditing and disbursement processing than do
the other two lines. In addition, the Homeowners line is having a much higher
rate of cancellation relative to the other two lines (over 50% of new policies).
Lastly, the Homeowners line has more premium collections compared to the
other two lines. Possibly, the Homeowners line is collected in smaller
amounts from more customers than the other two lines. In contrast, the
Workers’ Compensation line consumes the fewest administrative activities,
causing it to be very profitable. The Auto line is in between these two.
523
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accessible website, in whole or in part.