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Blue Ridge Manufacturing: Activity Based Costing

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The cost accounting system is fairly sophisticated with respect to variable product costs, but thus far indirect costs have been allocated to products based on their contribution margin. Management realized that many general overhead items represented resources consumed in proportions different than the relative gross profit (contribution margin) of the product line (their current basis for allocation of the indirect manufacturing expenses). Management decided to use activity-based costing to determine product line profitability (income).

See attached for the results of the management's analysis. The indirect costs have been pooled into 12 activity pools, and an activity measure has been selected for each pool.

1. Identify the amount of indirect costs that would be attributed to each product line using activity-based costing (ABC).

2. Recalculate the profitability of each product line.

3. The company considered putting a greater share of the production resources towards the sports line. What do your results in part two imply about the product line's continued success, and whether the company should appropriate more resources to that line? Or, should the sports line be dropped? Is it possible to know why market share (sales) for the sports line was increasing? Are there other things the company could do to make the sports line more profitable, (considering pricing, product options, cost reduction, and so on)?

4. What are the benefits of ABC that a single, volume-based allocation cannot give?

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Solution Summary

Your instruction is attached, in Excel. You can see the analysis of the cost of each activity and then the allocation of those costs back to the product line in the new income statement.

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Your instruction is attached, in Excel. You can see the analysis of the cost of each activity and then the allocation of those costs back to the product line in the new income statement.

3.  The firm was considering devoting a greater share of the production resources to the sports line.  What do your results in part two imply about the product line's continued success, and whether the firm should devote more resources to that line?  You should consider and ...

Solution provided by:
Carol Sargent, PhD
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  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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