Activity Based Costing:

In searching for a clear answer, Marc Johnson recently attended a seminar on a new concept called Activity Based Costing. Following the suggested steps of setting up an ABC system, Johnson first identified four categories of support expenses that were currently being allocated to crayon production. He determined that the fringe benefits were $25\%$ of labor expenses $($both direct and indirect$)$ and would thus represent just a percentage markup to be applied on top of direct and indirect labor charges. The table below provides the monthly expense categories and amounts.

Crazy Crayon had seven production employees who did both the actual work of producing the crayons as well as all of the production support work. The costing system treated the employees as $$direct labor$$ when they ran the production process and $$indirect$$ when they did everything else such as setting up a machine from one production run to the next, scheduling production runs, ordering and receiving raw materials, and maintaining records on the various products. Johnson interviewed these employees and found that three main activities accounted for their support work, with the following estimates on the percentages of time spent on the three activities:

Scheduling production runs $(30\%)$ includes scheduling production orders, purchasing, preparing, and releasing wax materials for the production run.

Setting up production runs $(60\%)$ refers to the physical changeover from one color crayon to another. Three employees worked as a team to perform each changeover. The time to change over to BLACK crayons was relatively short $($about $1$ hour$)$ since the previous color did not have to be completely eliminated from the molding machine. Other colors required longer changeover times; RED crayons required the most extensive changeover to meet the demanding quality specification for this color.

Maintaining the four products $(10\%)$ includes maintaining the bill of materials and routing information, monitoring a minimum supply of raw materials and finished goods inventory for each product, and improving the production processes.

The remaining two categories of overhead expense $($lease payment and energy to operate the machines$)$ were primarily incurred to supply machine capacity to produce the crayons.

Table $2$ below provides information on potential activity cost drivers of Crazy Crayon$$s activities for each of the four products.

Question $3$:

a$.$ Complete the following table of stage I allocation. First, in the row immediately below $$activities$,$ fill in the major activities that consume the indirect cost. Second, for each indirect cost item $($rows $3-5),$ separate the cost into activity cost pools. Lastly, in rows $6-8,$ for each activity, calculate the total costs, identify an appropriate cost driver, and compute the cost driver rate.

b$.$ Complete the table of Stage II allocation in the attached Excel file. If Crazy Crayon Inc. assigns overhead costs using the cost drivers in the table, how much overhead will be allocated to each product line? How much is the gross margin ratio for each product line?