Question

Durban Metal Products, Ltd., of the Republic of South Africa makes specialty metal parts used in applications ranging from the cutting edges of bulldozer blades to replacement parts for Land Rovers. The company uses an activity-based costing system for internal decision-making purposes. The company has four activity cost pools as listed below:

Activity Cost Pool	Activity Measure	Activity Rate
Order size	Number of direct labor-hours	$	17.70	per direct labor-hour
Customer orders	Number of customer orders	$	357.00	per customer order
Product testing	Number of testing hours	$	71.00	per testing hour
Selling	Number of sales calls	$	1,497.00	per sales call

The managing director of the company would like information concerning the cost of a recently completed order for heavy-duty trailer axles. The order required 150 direct labor-hours, 16 hours of product testing, and 5 sales calls.

Required:

What is the total overhead cost assigned to the order for heavy-duty trailer axles?

Activity Cost Pool	ABC Cost
Order size
Customer orders
Product testing
Selling
Total overhead cost	$0

2. Thermal Rising, Inc., makes paragliders for sale through specialty sporting goods stores. The company has a standard paraglider model, but also makes custom-designed paragliders. Management has designed an activity-based costing system with the following activity cost pools and activity rates:

Activity Cost Pool	Activity Rate
Supporting direct labor	$	18	per direct labor-hour
Order processing	$	198	per order
Custom design processing	$	263	per custom design
Customer service	$	430	per customer

Management would like an analysis of the profitability of a particular customer, Big Sky Outfitters, which has ordered the following products over the last 12 months:

	Standard Model		Custom Design
Number of gliders		10		2
Number of orders		1		2
Number of custom designs		0		2
Direct labor-hours per glider		29.50		32.00
Selling price per glider	$	1,700	$	2,330
Direct materials cost per glider	$	468	$	572

The company’s direct labor rate is $16 per hour.

Using the company’s activity-based costing system, compute the customer margin of Big Sky Outfitters. (Round your intermediate calculations and final answer to the nearest whole dollar amount. Loss amounts should be entered with a minus sign.)

Answer 1

Problem 1 –

			Heavy Duty Trailer Axles
Activity Cost Pool	Activity Rate per Activity (A)	Expected Activity (H)	Overhead Assigned (A*H)
Order Size	$17.70	Per DLH	150	$2,655
Customer Orders	$357	per customer order	1	$357
Product Testing	$71	per testing hour	16	$1,136
Selling	$1,497.00	per sales call	5	$7,485
Total Assigned Overhead Costs				$11,633

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