Exam 3 - Practice Problems.pdf

# It allocated office overhead costs to each customer

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recently, QUICK estimated the profitability of each of its customers using a conventional approach. It allocated office overhead costs to each customer based on the proportion of revenues that each customer provided to the firm. For 2011, the following additional information is available: Customers Ivory Okay LeBon Total Revenues \$582,000 322,000 212,000 1,116,000 Technician and equipment costs 407,000 282,000 178,000 867,000 Recently, QUICK’s controller noted that office overhead costs amounted to more than 13% of the company’s total costs. She decided to analyze how office overhead resources were used to service the company’s customers. She collected the following information: Office Activity Cost Allocation Rate Service call handling \$75 per service call Parts ordering \$80 per web-based parts order Billing and collection \$50 per bill (or reminder) Customer database maintenance \$10 per service call Ivory Okay LeBon Number of service calls 190 360 180 Number of web-based parts orders 180 360 150 Number of bills (or reminders) 120 150 120

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Exam 3 – Practice Problems Page 28 Required: 1. (8 points) Using QUICK’s conventional method of allocating office overhead costs, estimate the amount of operating income the firm earned from each of its customers for 2011. Estimated operating income from Ivory \$ 2. (6 points) Using the information obtained by QUICK’s controller, estimate the amount of operating income the firm earned from each of its customers for 2011. Estimated operating income from Ivory \$ Estimated operating income from Okay \$ Estimated operating income from LeBon \$ Estimated operating income from Okay \$ Estimated operating income from LeBon \$
Exam 3 – Practice Problems Page 29 3. (2 points) Based on the available information, what would you recommend that QUICK do with respect to its relationship with its customers? Why? 4. (2 points) Which of the following statements about Activity Based Costing is not true ? a) Using ABC, costs are traced to activities, and then from activities to products. b) Companies with a diverse set of operating activities and diverse range of products are more likely to benefit from the use of ABC. c) ABC systems attempt to rectify the tendency of conventional accounting systems to over-cost low-volume products and under-cost high-volume products. d) Activity based accounting can be used in conjunction with either job costing or process costing systems.

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Exam 3 – Practice Problems Page 30 SOLUTION: 1. (8 points) Using QUICK’s conventional method of allocating office overhead costs, estimate the amount of operating income the firm earned from each of its customers for 2011. Total Office Overhead Costs: Service call handling = 75 x (190 + 360 + 180) = 54,750 Parts ordering = 80 x (180 + 360 + 150) = 55,200 Billing and collection = 50 x (120 + 150 + 120) = 19,500 Customer database maintenance = 10 x (190 + 360 + 180) = 7,300 136,750 Overhead allocation rate = 136,750 = 0.1225/Revenue \$ 1,116,000 Ivory Okay LeBon Total Revenues 582,000 322,000 212,000 1,116,000 Technician and equipment cost Office overhead cost allocated 407,000 282,000 178,000 867,000 (= Revenues x 0.1225) 71,316 39,457 25,978 136,751 Operating income 103,684 543 8,022 112,249
Exam 3 – Practice Problems Page 31 2. (6 points) Using the information obtained by QUICK’s controller, estimate the amount of operating income the firm earned from each of its customers for 2011.

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