Koontz Company manufactures two models of industrialcomponentsâa Basic model and an Advanced Model. The companyconsiders all of its manufacturing overhead costs to be fixed andit uses plantwide manufacturing overhead cost allocation based ondirect labor-hours. Koontzâs controller prepared the segmentedincome statement that is shown below for the most recent year (heallocated selling and administrative expenses to products based onsales dollars):
Basic Advanced Total Number of units produced andsold 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 administrativeexpenses 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 $40per unit for the Basic model and $60 per unit for the Advancedmodel. Koontz is considering a change from plantwide overheadallocation to a departmental approach. The overhead costs in thecompanyâs Molding Department would be allocated based onmachine-hours and the overhead costs in its Assembly and PackDepartment would be allocated based on direct labor-hours. Toenable further analysis, the controller gathered the followinginformation:
Molding Assemble and Pack Total Manufacturing overheadcosts $ 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:
3. Koontzâs production manager has suggested usingactivity-based costing instead of either the plantwide ordepartmental approaches. To facilitate the necessary calculations,she assigned the companyâs total manufacturing overhead cost tofive activity cost pools as follows:
Activity Cost Pool Activity Measure Manufacturing Overhead Machining Machine-hours inMolding $ 417,500 Assemble and pack Direct labor hours in Assembleand 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 Basicand Advanced models is 400 units and 50 units, respectively. Themolding machines require a setup for each order. One setup hour isrequired for each customer order of the Basic model and three hoursare required to setup for an order of the Advanced model.
The company pays a sales commissions of 5% for the Basic modeland 10% for the Advanced model. Its traceable fixed advertisingcosts include $150,000 for the Basic model and $200,000 for theAdvanced model. The remainder of the companyâs selling andadministrative costs are organization-sustaining in nature.
Using the additional information provided by the productionmanager, calculate:
a. An activity rate for each activity cost pool.
b. The total manufacturing overhead cost allocated to the Basicmodel and the Advanced model using the activity-based approach.
c. The total selling and administrative cost traced to the Basicmodel and the Advanced model using the activity-based approach.
4. Using your activity-based cost assignments from requirement3, prepare a contribution format segmented income statement that isadapted from Exhibit 7-8. (Hint: Organize all of the companyâscosts into three categories: variable expenses, traceable fixedexpenses, and common fixed expenses.)
5. Using your contribution format segmented income statementfrom requirement 4, calculate the break-even point in dollar salesfor the Advanced model.
Koontz Company manufactures two models of industrialcomponentsâa Basic model and an Advanced Model. The companyconsiders all of its manufacturing overhead costs to be fixed andit uses plantwide manufacturing overhead cost allocation based ondirect labor-hours. Koontzâs controller prepared the segmentedincome statement that is shown below for the most recent year (heallocated selling and administrative expenses to products based onsales dollars):
| Basic | Advanced | Total | |||||
| Number of units produced andsold | 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 administrativeexpenses | 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 $40per unit for the Basic model and $60 per unit for the Advancedmodel. Koontz is considering a change from plantwide overheadallocation to a departmental approach. The overhead costs in thecompanyâs Molding Department would be allocated based onmachine-hours and the overhead costs in its Assembly and PackDepartment would be allocated based on direct labor-hours. Toenable further analysis, the controller gathered the followinginformation:
| Molding | Assemble and Pack | Total | |||||
| Manufacturing overheadcosts | $ | 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:
3. Koontzâs production manager has suggested usingactivity-based costing instead of either the plantwide ordepartmental approaches. To facilitate the necessary calculations,she assigned the companyâs total manufacturing overhead cost tofive activity cost pools as follows:
| Activity Cost Pool | Activity Measure | Manufacturing Overhead | ||
| Machining | Machine-hours inMolding | $ | 417,500 | |
| Assemble and pack | Direct labor hours in Assembleand 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 Basicand Advanced models is 400 units and 50 units, respectively. Themolding machines require a setup for each order. One setup hour isrequired for each customer order of the Basic model and three hoursare required to setup for an order of the Advanced model.
The company pays a sales commissions of 5% for the Basic modeland 10% for the Advanced model. Its traceable fixed advertisingcosts include $150,000 for the Basic model and $200,000 for theAdvanced model. The remainder of the companyâs selling andadministrative costs are organization-sustaining in nature.
Using the additional information provided by the productionmanager, calculate:
a. An activity rate for each activity cost pool.
b. The total manufacturing overhead cost allocated to the Basicmodel and the Advanced model using the activity-based approach.
c. The total selling and administrative cost traced to the Basicmodel and the Advanced model using the activity-based approach.
4. Using your activity-based cost assignments from requirement3, prepare a contribution format segmented income statement that isadapted from Exhibit 7-8. (Hint: Organize all of the companyâscosts into three categories: variable expenses, traceable fixedexpenses, and common fixed expenses.)
5. Using your contribution format segmented income statementfrom requirement 4, calculate the break-even point in dollar salesfor the Advanced model.
