Pickle Motorcycles, Inc. (PMI), manufactures three motorcycle models: a cruising

Question

Pickle Motorcycles, Inc. (PMI), manufactures three motorcycle models: a cruising bike (Route 66), a street bike (Main Street), and a starter model (Alley Cat). Because of the different materials used, production processes for each model differ significantly in terms of machine types and time requirements. Once parts are produced, however, assembly time per unit required for each type of bike is similar. For this reason, PMI allocates overhead on the basis of machine-hours. Last year, the company shipped 1,000 Route 66s, 4,000 Main Streets, and 10,000 Alley Cats and had the following revenues and expenses:

PICKLE MOTORCYCLES, INC.
Income Statement

Page 367

PMI’s chief financial officer (CFO) hired a consultant to recommend cost allocation bases. The consultant recommended the following:

The consultant found no basis for allocating the plant administration and other fixed overhead costs and recommended that these not be applied to products.

Required

Using machine-hours to allocate production overhead, complete the income statement for Pickle Motorcycles. (See the “using energy” activity for machine-hours.) Do not attempt to allocate plant administration or other fixed overhead.

Complete the income statement using the bases recommended by the consultant.

How might activity-based costing result in better decisions by Pickle Motorcycles’s management?

After hearing the consultant’s recommendations, the CFO decides to adopt activity-based costing but expresses concern about not allocating some of the overhead to the products (plant administration and other fixed overhead). In the CFO’s view, “Products have to bear a fair share of all overhead or we won’t be covering all of our costs.” How would you respond to this comment?

Can I get explanations that have not been used before?

PICKLE MOTORCYCLES, INC.
Income Statement

Route 66 Main Street Alley Cat Total Sales revenue $7,600,000 $11,200,000 $9,500,000 $28,300,000 Direct costs Direct materials   3,000,000     4,800,000   4,000,000   11,800,000 Direct labor      288,000        480,000   1,080,000     1,848,000 Variable overhead Machine setup        468,000 Order processing     1,152,000 Warehousing costs     1,674,000 Energy to run machines        756,000 Shipping        648,000 Contribution margin $  9,954,000 Fixed overhead Plant administration     1,760,000 Other fixed overhead     2,800,000 Gross profit $  5,394,000

Explanation / Answer

Working:

PICKLE MOTO CYCLE INC. Income statement ( Machine hour basis) Route 66 Main street Alley cat Total Sales Revenue 7600000 11200000 9500000 28300000 Direct Costs:     Direct material 3000000 4800000 4000000 11800000     Direct labor 288000 480000 1080000 1848000 Variable overhead 0     Machine setup 93600 149760 224640 468000     Order processing 230400 368640 552960 1152000     Warehousing costs 334800 535680 803520 1674000     Energy to run machines 151200 241920 362880 756000     Shipping 129600 207360 311040 648000 Total variable costs 4227600 6783360 7335040 18346000 Contribution margin 3372400 4416640 2164960 9954000 Fixed overhead      Plant administration 1760000     Other fixed overhead 2800000 Total fixed overhead 4560000 Gross profit 5394000 Workings: Route 66 Main street Alley cat Total     Machine hours 10000 16000 24000 50000     Machine setup 93600 149760 224640 468000     Order processing 230400 368640 552960 1152000     Warehousing costs 334800 535680 803520 1674000     Energy to run machines 151200 241920 362880 756000     Shipping 129600 207360 311040 648000 Total 939600 1503360 2255040 4698000

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