The cost accounting system is fairly sophisticated with respect to variable product costs, but thus far indirect costs have been allocated to products based on their contribution margin. Management realized that many general overhead items represented resources consumed in proportions different than the relative gross profit (contribution margin) of the product line (their current basis for allocation of the indirect manufacturing expenses). Management decided to use activity-based costing to determine product line profitability (income).
See the results of the management's analysis. The indirect costs have been pooled into 12 activity pools, and an activity measure has been selected for each pool.
Blue Ridge Manufacturing
Segmented Income Statement
|
|
Designer |
Children's |
Sports |
Total |
|
|
|
|
|
|
| Sales |
|
$3,464,915 |
$3,246,587 |
$1,739,510 |
$8,451,012 |
| Less: |
|
|
|
|
|
| Variable product costs |
|
1,829,464 |
1,977,798 |
1,137,225 |
4,944,487 |
| Commissions |
|
236,805 |
256,006 |
147,202 |
640,013 |
|
|
|
|
|
|
| Contribution Margin |
|
$1,398,646 |
$1,012,783 |
$455,083 |
$2,866,512 |
| Less: |
|
|
|
|
|
| Indirect expenses |
|
687,601 |
497,903 |
223,728 |
1,409,232 |
|
|
|
|
|
|
| Income |
|
$711,045 |
$514,880 |
$231,355 |
$1,457,280 |
Blue Ridge Manufacturing
ABC Analysis of Indirect Costs
|
|
|
|
Activity Measure Used By: |
| Activity Cost Pool |
Amount |
|
Activity Measure |
Designer |
Children's |
Sports |
|
|
|
|
|
|
|
| Designer Pay |
$488,260 |
|
Hours worked |
10,105 |
3,857 |
14,760 |
| Supervisory pay |
163,176 |
|
Hours worked |
76,411 |
82,606 |
47,498 |
| Samples |
218,711 |
|
Number of items |
2,223 |
2,224 |
1,229 |
| Setup costs |
76,220 |
|
Number of setups |
15,806 |
15,807 |
11,290 |
| Travel for design |
47,266 |
|
Travel hours |
3,985 |
2,213 |
6,476 |
| Scheduling |
67,142 |
|
Number of orders |
246 |
1,870 |
11,990 |
| Customer service |
13,369 |
|
Number of calls |
118 |
882 |
13,580 |
| Design office costs |
7,925 |
|
Square feet occupied |
900 |
811 |
1,004 |
| Supervisory, setup, and |
|
|
|
|
|
|
| schedulers office costs |
66,665 |
|
Square feet occupied |
1,800 |
1,622 |
2,008 |
| Inspection |
13,501 |
|
Number of inspections |
1,897 |
1,297 |
7,113 |
| Purchasing |
175,356 |
|
Number of unique items |
1,870 |
246 |
11,990 |
| Materials handling |
71,641 |
|
Number of material moves |
118 |
882 |
13,580 |
|
|
|
|
|
|
|
| Total Costs |
$1,409,232 |
|
|
|
|
|
1. Identify the amount of indirect costs that would be attributed to each product line using activity-based costing (ABC).
2. Recalculate the profitability of each product line.
3. The company considered putting a greater share of the production resources towards the sports line. What do your results in part two imply about the product line's continued success, and whether the company should appropriate more resources to that line? Or, should the sports line be dropped? Is it possible to know why market share (sales) for the sports line was increasing? Are there other things the company could do to make the sports line more profitable, (considering pricing, product options, cost reduction, and so on)?
4. What are the benefits of ABC that a single, volume-based allocation cannot give?