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CMA Solved Case

This document summarizes the overhead costs and activity-based costing system of Ferris Corporation, which manufactures and sells fire-resistant filing cabinets. It allocates $800,000 in total overhead costs across four activity cost pools: assembling units, processing orders, supporting customers, and other. It then calculates activity rates for each pool and uses these rates to compute the overhead costs of 80 units ordered in four orders by one of Ferris' customers, OfficeMart.

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saloni gupta
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102 views2 pages

CMA Solved Case

This document summarizes the overhead costs and activity-based costing system of Ferris Corporation, which manufactures and sells fire-resistant filing cabinets. It allocates $800,000 in total overhead costs across four activity cost pools: assembling units, processing orders, supporting customers, and other. It then calculates activity rates for each pool and uses these rates to compute the overhead costs of 80 units ordered in four orders by one of Ferris' customers, OfficeMart.

Uploaded by

saloni gupta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Ferris Corporation makes a single product - a fire resistant commercial filing cabinet - that it sells to

office furniture distributors. The company has a simple ABC system that it uses for internal decision
making. The company has two overhead departments whose costs are listed below:

Manufacturing overhead $5,00,000


Selling and administrative overhead $300,000

Total overhead costs $8,00,000

The company's activity based costing system has the following activity cost pools and activity
measures:

Activity Cost Pool Activity Measures


Assembling units Number of units
Processing orders Number of orders
Supporting customers Number of customers
Other Not applicable

Costs assigned to the "other" activity cost pool have no activity measure; they consist of the costs of
unused capacity and organization-sustaining costs - neither of which are assigned to products, orders
or customers.

Ferris Corporation distributes the costs of manufacturing overhead and of selling and administrative
overhead to the activity cost pools based on employee interviews, the results of which are reported
below:

Distribution of Resource Consumption Across Activity Cost Pools


Assembling Processing Supporting Other Total
Units Orders Customers
Manufacturing overhead 50% 35% 5% 10% 100%
Selling and administrative 10% 45% 25% 20% 100%
overhead
Total activity 1,000 units 250 orders 100 -- --
customers

Required:

1. Perform the first stage allocation of overhead costs to the activity cost pools.
2. Compute activity rates for the activity cost pools.
3. OfficeMart is one of the Ferris Corporation's customers. Last year OfficeMart ordered filing
cabinet four different times. OfficeMart ordered a total of 80 cabinets during the year.
Construct a table showing the overhead costs of these 80 units and four orders.
Solution:

1. The first stage allocation of costs to the activity cost pools appears below:

Activity Cost Pools


Assembling Processing Supporting Other Total
Units Orders Customers
Manufacturin $250,000 $175,000 $25,000 $50,000 $500,000
g overhead
Selling and 30,000 135,000 75,000 60,000 300,000
administrativ
e overhead

Total activity $280,000 $310,000 $100,000 $110,000 $800,000

2. The activity rates for the activity cost pools are:

Activity Cost Pools Total Cost Total Activity Activity Rate


Assembling units $280,000 1,000 units $280 per unit
Processing orders $310,000 250 units $1,240 per order
Supporting customers $100,000 100 customers $1,000 per customer

3. The overhead cost for the four orders of a total of 80 filing cabinets would be computed as follows:

Activity Cost Pools Total Cost Total Activity Activity Rate


Assembling units $280 per unit 80 units $22,400
Processing orders $1,240 per order 4 units $4,960
Supporting customers $1000 per customer Not applicable

4. The product and customer margin can be computed as follows:

Filing Cabinet Product Margin:


Sales ($595 per unit × 80 units) $47,600
Cost:
Direct materials ($180 per unit × 80 units) $14,400
Direct materials ($50 per unit × 80 units) 4,000
Volume related overhead (above) 22,400
Order related overhead (above) 4,960 45,760

$1,840
==========
Customer profitability Analysis - OfficeMart
Product margin (above) $1,840
Less: Customer support overhead (above) 1,000

$840

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