Baxter Battery Company

Income Statement
Year Ended December 31, 20X0

Sales $ 50,000,000
Cost of goods sold
Direct materials $ 15,000,000
Direct labor 12,000,000
Manufacturing overhead 14,000,000 41,000,000
Gross margin 9,000,000
Selling and administrative expenses
Shipping expense 3,000,000
Marketing expense 2,000,000
General administrative expense 6,000,000 11,000,000
Net operating loss $ (2,000,000)
 Overhead Costs at Baxter Battery
(Manufacturing and Nonmanufacturing)

Production Department
Indirect factory wages $ 6,000,000
Factory equipment depreciation 3,500,000
Factory utilities 2,500,000
Factory building lease 2,000,000 $ 14,000,000
General Administrative Department
Administrative wages and salaries 4,000,000
Office equipment depreciation 900,000
Administrative building lease 1,100,000 6,000,000
Marketing Department
Marketing wages and salaries 1,500,000
Selling expenses 500,000 2,000,000
Total overhead costs $ 22,000,000
 Activity Cost Pools
Customer Design
Orders Changes Order Size
Production Department
Indirect factory wages 30% 30% 20%
Factory equipment depreciation 20% 10% 60%
Factory utilities 0% 10% 60%
Factory building lease 0% 0% 0%
General Administrative Department
Administrative wages and salaries 30% 10% 10%
Office equipment depreciation 30% 10% 0%
Administrative building lease 0% 0% 0%
Marketing Department
Marketing wages and salaries 30% 10% 0%
Selling expenses 20% 0% 0%

Activity Cost Pools

Customer Design
Orders Changes Order Size
Production Department
Indirect factory wages
Factory equipment depreciation
Factory utilities
Factory building lease
General Administrative Department
Administrative wages and salaries
Office equipment depreciation
Administrative building lease
Marketing Department
Marketing wages and salaries
Selling expenses
Total
Customer
Relations Other Total

10% 10% 100%

0% 10% 100%
0% 30% 100%
0% 100% 100%

30% 20% 100%

20% 40% 100%
0% 100% 100%

50% 10% 100%

70% 10% 100%

Customer
Relations Other Total
 Computation of Activity Rates
(a) (b) (a) ÷ (b)
Activity Cost Pools Total Cost Total Activity Activity Rate
Customer orders $ 4,520,000 10,000 orders
Design changes 3,040,000 4,000 changes
Order size 5,200,000 800,000 MHs
Customer relations 3,080,000 2,000 customers
Other 6,160,000 Not applicable Not applicable
Total $ 22,000,000
 ctivity Rate
per order
per change
per MH
per customer
Not applicable
SureStart
Requires no new design resources.
800,000 batteries ordered with 4,000 separate orders.
Each SureStart requires 36 minutes of machine
time for a total of 480,000 machine-hours.

LongLife
Requires new design resources.
400,000 batteries ordered with 6,000 separate orders.
4,000 custom designs prepared.
Each LongLife requires 48 minutes of machine
time for a total of 320,000 machine-hours.
 Overhead Cost for the SureStart
(a) (b) (a) × (b) Sales
Activity Cost Pools Activity Rate Activity ABC Cost Direct costs
Customer orders $ 452.00 4,000
Design changes 760.00 -
Order size 6.50 480,000
Total ABC cost assignments

Overhead Cost for the LongLife Total costs

(a) (b) (a) × (b) Product margin
Activity Cost Pools Activity Rate Activity ABC Cost
Customer orders $ 452.00 6,000 Less costs not assigned to
Design changes 760.00 4,000
Order size 6.50 320,000
Total Net operating loss
 SureStarts LongLifes Total
$ 31,300,000 $ 18,700,000 $ 50,000,000
Direct costs
Direct material 9,000,000 6,000,000 15,000,000
Direct labor 7,000,000 5,000,000 12,000,000
Shipping 2,000,000 1,000,000 3,000,000
ABC cost assignments
Customer orders
Design changes
Order size
Total costs
Product margin

Less costs not assigned to products

Customer relations
Other
Net operating loss
Orders
Eight orders for 60 SureStarts per order.
Four orders for 50 LongLifes per order.

Machine-hours
The 480 SureStarts required 288 machine-hours.
The 200 LongLifes required 160 machine hours.
 Overhead Cost for Acme Auto Parts
(a) (b) (a) × (b)
Activity Cost Pools Activity Rate Activity ABC Cost
Customer orders $ 452.00 12
Design changes 760.00 4
Order size 6.50 448
Customer relations 1,540.00 1
Total

Acme Auto
Parts
Sales $ 29,200
Direct costs
Direct material 7,500
Direct labor 6,700
Shipping 1,700
ABC cost assignments
Customer orders
Product design
Order size
Customer relations
Total costs
Customer margin
 SureStarts LongLifes Total Manufacturing Overh
Sales $ 31,300,000 $ 18,700,000 $ 50,000,000
Direct costs Production Department
Direct material 9,000,000 6,000,000 15,000,000
Direct labor 7,000,000 5,000,000 12,000,000

Total manufacturing overhe

Plantwide manufacturing O
 Manufacturing Overhead Costs at Baxter Battery
SureStarts (800,000 @ 0.60 hours)
Production Department LongLifes (400,000 @ 0.80 hours)
Indirect factory wages $ 6,000,000 Total machine-hours
Factory equipment depreciation 3,500,000 Selling and administrative expenses
Factory utilities 2,500,000
Factory building lease 2,000,000
Total manufacturing overhead $ 14,000,000
Plantwide manufacturing OH

Sales
Cost of goods sold

Product margin

Net operating loss

Sur
Product margins – traditional $ 6
Product margins – ABC 8
Change in reported margins $ 1
 Machine-h MOH
480,000 -
320,000 -
800,000 -

Shipping expense 3,000,000

Marketing expense 2,000,000
General administrative expense 6,000,000
Total 11,000,000

SureStarts LongLifes
$ 31,300,000 $ 18,700,000

Direct materials $ 9,000,000 $ 6,000,000

Direct labor 7,000,000 5,000,000
Manufacturing overhead

Selling and administrative

SureStarts LongLifes
– traditional $ 6,900,000 $ 2,100,000
– ABC 8,372,000 (1,132,000)
ted margins $ 1,472,000 $ (3,232,000)
 Total
$ 50,000,000

$ 15,000,000
12,000,000

11,000,000