Classic Windows is a small company that builds speciality wooden windows for local builders. For years the company has relied on a simple costing system based on direct labour-hours (DLHs) for determining the costs of its products. However, the company's president became interested in activity-based costing after reading an article about ABC in a trade journal. An activity-based costing design team was put together, and within a few months a simple system consisting of four activity cost pools had been designed. The activity cost pools and their activity measures appear below:

The Processing Orders activity cost pool includes order taking, job set-up, job scheduling and so on. Direct materials and direct labour are directly assigned to jobs in both the traditional and activity-based costing systems. The total overhead cost (both non-manufacturing and manufacturing) for the year is £1,370,000 and 

Based largely on interviews with employees, the distribution of resource consumption across the activities has been estimated as follows: includes the following costs:

Management of the company is particularly interested in measuring the profitability of two customers. One of the customers, Kuszik Builders, is a low-volume purchaser. The other, Western Homes, is a relatively high volume purchaser. Details of these two customers’ orders for the year appear below:

Required
1. The company’s traditional costing system applies manufacturing overhead to jobs strictly on the basis of direct labour-hours. Using this traditional approach, carry out the following steps:
(a) Compute the predetermined manufacturing overhead rate.
(b) Compute the total margin for all of the windows ordered by Kuszik Builders according to the traditional costing system. Do the same for Western Homes.
2. Using activity-based costing, carry out the following steps:
(a) Perform the first-stage allocation of costs to the activity cost pools.

(b) Compute the activity rates for the activity cost pools.

(c) Compute the overhead costs of serving each of the two customers.

(d) Prepare an action analysis report showing the margin on business with Kuszik Builders. (The ease of adjustment codes appear below.) Repeat for Western Homes.

3. Does Classic Windows appear to be losing money on either customer? Do the traditional and activity based costing systems agree concerning the profitability of the customers? If they do not agree, which costing system do you believe? Why?

Transcribed Image Text:

Activity cost pool Making windows Processing orders Customer relations Other (costs of idle capacity and organization-sustaining costs) Activity measure Direct labour-hours Number of orders Number of customers None Activity for the year 100,000 DLHS 2,000 orders 100 customers Not applicable