Question

Problem 4: Explanation of ABC Costing The United Center is home to both the Chicago Blackhawks and the Chicago Bulls in addition to hosting other special events (circus, Disney On Ice, etc). They are trying to determine the profitability of each type of activity (Bulls, Blackhawks, and Special Events). They have identified the following costs and want to use ABC to allocate these costs: Interest on Mortgage / Real Estate Taxes Salaries of Maintenance Personnel Set-Up Costs for Events (games and special events). Ticket Reservations / Ticket Sales $20,000,000 950,000 300,000 1,400,000 Here is other data related to the allocation of the indirect costs. Bulls Blackhawks 45 Special Events 30 Total Dates Total Tickets Sold Total Set-Up Hours 3000 Total Clean-Up Hours Average Ticket Price 45 900,000 800,000 6,000 1,800 450,000 7,500 1,000 1,200 $100 $105 $65 Write a memo to Mary Reinsdorf-Wirtz, CEO of the United Center. In the memo explain to her the concept of ABC and how the above costs should be allocated. Also, attach a partial income statement showing revenues, the indirect costs (all four) and net income for each type of event and the total. You will have to decide how to allocate the indirect costs however use ABC and show the allocation for all four indirect costs. The memo should be professionally typed and reviewed for errors.

please do it in a excel spreadsheet

Answer 1

Ans. Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each.

It uses cost drivers to allocate indirect cost to various processes.

Allocation of Indirect Cost

Sl no.	Indirect Cost	Cost Driver	Bulls	Blackhawks	Special Events	Total
1	Interest on Mortgage	Total dates	7,500,000 (20,000,000x45/120)	7,500,000 (20,000,000x45/120)	5,000,000 (20,000,000x30/120)	20,000,000
2	Salaries of maintenance Personnel	Total Cleanup Hours	285,000 (950,000x1,200/4,000)	427,500 (950,000x1,800/4,000)	237,500 (950,000x1,000/4,000)	950,000
3	Setup Costs	Total Setup Hours	54,545 (300,000x3,000/16,500)	109,091 (300,000x6,000/16,500)	136,364 (300,000x7,500/16,500)	300,000
4	Ticket Reservations	Total Tickets sold	586,047 (1,400,000x900,000/2,150,000)	520,930 (1,400,000x800,000/2,150,000)	293,023 (1,400,000x450,000/2,150,000)	1,400,000
	TOTAL		8,425,592	8,557,521	5,666,887	22,650,000

Partial Income Statement

	Particulars	Bulls	BalckHawks	Special	Total
	Revenue from Tickets	90,000,000 (900,000 x 100)	84,000,000 (800,000 x 105)	29,250,000 (450,000 x 65)	2,03,250,000
Less:	Indirect Costs	8,425,592	8,557,521	5,666,887	22,650,000
	Net Profit	81,574,408	75,442,479	23,583,113	1,80,600,000