Question

A. Fence Industries is preparing its annual profit plan. As part of its analysis of the profitability of its customers, management estimates that the $18,000 for sales support should be assigned to the individual customers from the information given as follows:

	Customer A	Customer B
Units purchased	150,000	250,000
Purchase orders (annual)	10	30

1. What is the amount of the sales support costs that should be allocated to Customer A, assuming Fence uses units purchased to compute activity-based costs?
2. What is the amount of the sales support costs that should be allocated to Customer A, assuming Fence uses purchase orders to compute activity-based costs?
3. What is the difference in sales support allocated to Customer A by these two approaches?

B. Georgia Publishing reports the following information about resources. At the beginning of the year, Georgia estimated it would spend $42,000 for setups and $21,000 for clerical.

	Cost Driver
	Rate			Volume
Resources used:
Setups	$	250		160	runs
Clerical	$	30		550	pages typed
Resources supplied:
Setups	$	44,000
Clerical		22,000

Answer 1

ANSWER A.

1. amount of the sales support costs that should be allocated to Customer A, assuming Fence uses units purchased to compute activity-based costs

Activity cost rate : Total cost/Units purchased

= 18000/ (150000+250000)

= 18000/ 400000

= $ 0.045 per unit

cost allocated to A= 0.045 *150000 = $ 6750

2. amount of the sales support costs that should be allocated to Customer A, assuming Fence uses purchase orders to compute activity-based costs

Activity cost rate : Total cost/ purchase orders

= 18000/ (10 + 30)

= 18000/ 40

= 450

cost allocated to A= 450 *10 = $ 4500

3.  difference in sales support allocated to Customer A by these two approaches = 6750 -4500 = $2250

ANSWER B.

Unused Resource Capacity for Setups = 44000 - [250*160] = 4000

Unused Resource Capacity for Clerical = 22000 - [30*550] = 5500