Question

Allocating Selling and Administrative Expenses using Activity-Based Costing

Shrute Inc. manufactures office copiers, which are sold to retailers. The price and cost of goods sold for each copier are as follows:

Price	$700	per unit
Cost of goods sold	420
Gross profit	$280	per unit

In addition, the company incurs selling and administrative expenses of $284,420. The company wishes to assign these costs to its three major retail customers, The Warehouse, Kosmo Co., and Supply Universe. These expenses are related to its three major nonmanufacturing activities: customer service, sales order processing, and advertising support. The advertising support is in the form of advertisements that are placed by Shrute Inc. to support the retailer's sale of Shrute copiers to consumers. The budgeted activity costs and activity bases associated with these activities are:

Activity		Budgeted Activity Cost			Activity Base
Customer service			$35,040		Number of service requests
Sales order processing			23,280		Number of sales orders
Advertising support			226,100		Number of ads placed
	Total activity cost		$284,420

Activity-base usage and unit volume information for the three customers is as follows:

	The Warehouse			Kosmo Co.		Supply Universe		Total
Number of service requests	50			10		180		240
Number of sales orders	270			120		580		970
Number of ads placed	20			20		130		170
Unit volume	570			570		570		1,710

Required:

1. Determine the activity rates for each of the three nonmanufacturing activities. Round to the nearest whole dollar.

	Activity Rate
Customer Service	$	per serv. req.
Sales Order Processing	$	per bid
Advertising Support	$	per customer design change

2. Determine the activity costs allocated to the three customers, using the activity rates in (1).

	Activity Costs
The Warehouse	$
Kosmo Co.	$
Supply Universe	$

3. Construct customer profitability reports for the three customers, dated for the year ended December 31, 2016, using the activity costs in (2). The reports should disclose the gross profit and income from operations associated with each customer. Enter all amounts as positive numbers, except for a negative income from operations.

Shrute Inc.
Customer Profitability Report
For the Year Ended December 31
	The Warehouse	Kosmo Co.	Supply Universe
Revenues	$	$	$
Cost of goods sold
Gross profit	$	$	$
Selling and administrative activities:
Customer service	$	$	$
Sales order processing
Advertising support
Total selling and administrative activities	$
Income (loss) from operations	$	$	$

Answer 1

1	Activities	Costs	Cost drivers	Cost driver total	Overhead rate(Costs/Cost driver total)
	Customer Service	$35,040	No. of service requests	240	$146.00	per service requests
	Sales order processing	$23,280	No. of sales orders	970	$24.00	per sales orders
	Advertising support	$2,26,100	No. of ads placed	170	$1,330.00	per ads placed
2	Computation of Activity cost
		Warehouse	Kosmo co.	Supply universe
	Customer Service(No. of service requests*$146)	$7,300	$1,460	$26,280
	Sales order processing(No. of sales orders*$24)	$6,480	$2,880	$13,920
	Advertising support(No. of ads placed*$1330)	$26,600	$26,600	$1,72,900
	Total Activity cost	$40,380	$30,940	$2,13,100
3	Shrute Inc.
	Customer Profitability Report
	For the year ended December 31
		Warehouse	Kosmo co.	Supply universe
	Revenues	$3,99,000	$3,99,000	$3,99,000
	Cost of goods sold	$2,39,400	$2,39,400	$2,39,400
	Gross Profit	$1,59,600	$1,59,600	$1,59,600
	Selling and admin activities:
	Customer Service	$7,300	$1,460	$26,280
	Sales order processing	$6,480	$2,880	$13,920
	Advertising support	$26,600	$26,600	$1,72,900
	Total Selling and admin activities	$40,380	$30,940	$2,13,100
	Income/(Loss) from operations	$1,19,220	$1,28,660	-$53,500