Financial & Managerial Accounting
14th Edition
ISBN: 9781337119207
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Chapter 18, Problem 18.18EX
Construct and interpret a product profitability report, allocating selling and administrative expenses
Naper Inc. manufactures power equipment. Naper has two primary products—generators and air compressors. The following report was prepared by the controller for Naper’s senior marketing management for the year ended December 31:
| Generators | Air Compressors | Total | |
| Revenue | $4,200,000 | $3,000,000 | $7,200,000 |
| Cost of goods sold | 2,940,000 | 2,100,000 | 5,040,000 |
| Gross profit | $1,260,000 | $ 900,000 | $2,160,000 |
| Selling and administrative expenses | 610,000 | ||
| Income from operations | $1,550,000 |
The marketing management team was concerned that the selling and administrative expenses were not traced to the products. Marketing management believed that some products consumed larger amounts of selling and administrative expense than did other products. To verify this, the controller was asked to prepare a complete product profitability report, using activity-based costing.
The controller determined that selling and administrative expenses consisted of two activities: sales order processing and post-sale customer service. The controller was able to determine the activity base and activity rate for each activity, as follows:
| Activity | Activity Base | Activity Rate |
| Sales order processing | Sales orders | $ 65 per sales order |
| Post-sale customer service | Service requests | $200 per customer service request |
The controller determined the following activity-base usage information about each product:
| Generators | Air Compressors | |
| Number of sales orders | 3,000 | 4,000 |
| Number of service requests | 225 | 550 |
A. Determine the activity cost of each product for sales order processing and post-sale customer service activities.
B. Use the information in (A) to prepare a complete product profitability report dated for the year ended December 31. Compute the gross profit to sales and the income from operations to sales percentages for each product. (Round to two decimal places.)
C. Interpret the product profitability report. How should management respond to the report?
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Assume you are the department B manager for Marley's Manufacturing. Marley's operates under a cost-based transfer structure. Assume you receive the majority of your raw
materials from department A, which sells only to department B (they have no outside sales).
The income statement for Marley's Manufacturing is shown below:
Marley's Manufacturing
Income Statement
Month Ending August 31, 2018
Dept. A
Dept. B
Sales
$23,000
$52,000
Cost of goods sold
11,040
27,560
Gross profit
$11,960
$24,440
Utility expenses
1,380
3,640
Wages expense
5,980
10,920
Costs allocated from corporate
2,530
15,080
Total expenses
$9,890
$29,640
Operating income/(loss) in dollars
$2,070
-$5,200
Operating income/(loss) in percentage
9 %
-10 %
Assume the market price for the items your department purchase is 15% below what you are being charged by department A of Marley's Manufacturing.
Determine the operating income for department B, assuming department A "sold" department B 1,000 units during the month and…
Construct and Interpret a Product Profitability Report, Allocating Selling and Administrative Expenses
Naper Inc. manufactures power equipment. Naper has two primary products-generators and air compressors. The following report was prepared by the controller for Naper's senior marketing management for the year
ended December 31:
Air
Generators Compressors
Total
Revenue
$1,431,000
$2,094,800
$3,525,800
Cost of goods sold
1,073,250
1,571,100
2,644,350
Gross profit
$357,750
$523,700
$881,450
Selling and administrative expenses
189,650
Income from operations
$691,800
The marketing management team was concerned that the selling and administrative expenses were not traced to the products. Marketing management believed that some products consumed larger amounts of selling
and administrative expense than did other products. To verify this, the controller was asked to prepare a complete product profitability report, using activity-based costing.
The controller determined that selling and…
Construct and interpret a product profitability report, allocating selling and administrative expenses
Naper Inc. manufactures power equipment. Naper has two primary products—generators and air compressors. The following report was prepared by the controller for Naper's senior marketing management for the year ended December 31:
Line Item Description
Generators
Air Compressors
Total
Revenue
$4,200,000
$3,000,000
$7,200,000
Cost of goods sold
(2,940,000)
(2,100,000)
(5,040,000)
Gross profit
$1,260,000
$900,000
$2,160,000
Selling and administrative expenses
(610,000)
Operating income
$1,550,000
The marketing management team was concerned that the selling and administrative expenses were not traced to the products. Marketing management believed that some products consumed larger amounts of selling and administrative expense than did other products. To verify this, the controller was asked to prepare a complete product profitability report, using…
Chapter 18 Solutions
Financial & Managerial Accounting
Ch. 18 - Why would management be concerned about the...Ch. 18 - Why would a manufacturing company with multiple...Ch. 18 - How do the multiple production department and the...Ch. 18 - Under what two conditions would the multiple...Ch. 18 - Prob. 5DQCh. 18 - Prob. 6DQCh. 18 - Prob. 7DQCh. 18 - Under what circumstances might the activity-based...Ch. 18 - Prob. 9DQCh. 18 - Prob. 10DQ
Ch. 18 - Single plantwide factory overhead rate The total...Ch. 18 - Multiple production department factory overhead...Ch. 18 - Activity-based costing: factory overhead costs The...Ch. 18 - Activity-based costing: selling and administrative...Ch. 18 - Activity-based costing for a service business...Ch. 18 - Single plantwide factory overhead rate Nixon...Ch. 18 - Single plantwide factory overhead rate Mozart...Ch. 18 - Single plantwide factory overhead rate Sally...Ch. 18 - Product costs and product profitability reports,...Ch. 18 - Multiple production department factory overhead...Ch. 18 - Single plantwide and multiple production...Ch. 18 - Single plantwide and multiple production...Ch. 18 - Identifying activity bases in an activity-based...Ch. 18 - Product costs using activity rates Nozama.com Inc....Ch. 18 - Product costs using activity rates Atlas...Ch. 18 - Activity rates and product costs using...Ch. 18 - Activity cost pools, activity rates, and product...Ch. 18 - Activity-based costing and product cost distortion...Ch. 18 - Multiple production department factory overhead...Ch. 18 - Activity-based costing and product cost distortion...Ch. 18 - Single plantwide rate and activity-based costing...Ch. 18 - Evaluating selling and administrative cost...Ch. 18 - Construct and interpret a product profitability...Ch. 18 - Activity-based costing and customer profitability...Ch. 18 - Activity-based costing for a service company...Ch. 18 - Activity-based costing for a service company...Ch. 18 - Single plantwide factory overhead rate Orange...Ch. 18 - Multiple production department factory overhead...Ch. 18 - Activity-based and department rate product costing...Ch. 18 - Activity-based product costing Mello Manufacturing...Ch. 18 - Allocating selling and administrative expenses...Ch. 18 - Product costing and decision analysis for a...Ch. 18 - Single plantwide factory overhead rate Spoiled Cow...Ch. 18 - Multiple production department factory overhead...Ch. 18 - Activity-based department rate product costing and...Ch. 18 - Activity-based product costing Sweet Sugar Company...Ch. 18 - Allocating selling and administrative expenses...Ch. 18 - Product costing and decision analysis for a...Ch. 18 - Activity-based product cost improvement Gourmet...Ch. 18 - Prob. 2ADMCh. 18 - Production run size and activity improvement...Ch. 18 - Prob. 4ADMCh. 18 - Ethics in Action The controller of Tri Con Global...Ch. 18 - Communication The controller of New Wave Sounds...
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