Cost Accounting Quiz: Customer Profitability Analysis
11 questions · exam conditions
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Customer Profitability AnalysisQuestion 1 of 11

A company is comparing its traditional costing system, which allocates overhead at 20% of sales, with a new activity-based costing system. Under the ABC system, the only overhead activity is 'Client Services' with a cost driver rate of $200 per service hour. Client Alpha generated $500,000 in sales and required 300 service hours. The cost of goods sold for Client Alpha was $350,000. What is the difference in the calculated operating profit for Client Alpha between the traditional system and the ABC system?

$10,000 higher under ABC
$40,000 higher under ABC
$10,000 lower under ABC
$40,000 lower under ABC
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Cost Accounting Quiz

Cost Accounting Quiz: Customer Profitability Analysis

Practice Customer Profitability Analysis in Cost Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Customer Profitability Analysis, giving you a quick way to practice the rules, question types, and explanations that matter most for Cost Accounting.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

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Question 1

A company is comparing its traditional costing system, which allocates overhead at 20% of sales, with a new activity-based costing system. Under the ABC system, the only overhead activity is 'Client Services' with a cost driver rate of $200 per service hour. Client Alpha generated $500,000 in sales and required 300 service hours. The cost of goods sold for Client Alpha was $350,000. What is the difference in the calculated operating profit for Client Alpha between the traditional system and the ABC system?

  1. $10,000 higher under ABC
  2. $40,000 higher under ABC (correct answer)
  3. $10,000 lower under ABC
  4. $40,000 lower under ABC
Explanation: The question requires calculating the operating profit under both costing systems and then finding the difference.\nTraditional Costing:
  1. Overhead Allocation = 20% * $500,000 Sales = $100,000.
  2. Operating Profit = Sales - COGS - Overhead = $500,000 - $350,000 - $100,000 = $50,000.\nActivity-Based Costing:
  3. Overhead Allocation = 300 service hours * $200/hour = $60,000.
  4. Operating Profit = Sales - COGS - Overhead = $500,000 - $350,000 - $60,000 = 90,000.\n∗∗Difference:∗∗\n−TheprofitunderABC(90,000.\n**Difference:**\n- The profit under ABC (90,000) is 40,000higherthantheprofitunderthetraditionalsystem(40,000 higher than the profit under the traditional system (50,000).

Question 2

A manufacturing firm is implementing an activity-based costing system. One of the primary activities is 'Production Setup,' which is driven by the number of production runs. The total estimated cost for this activity consists of $80,000 in indirect labor and $45,000 in machine depreciation. The company anticipates a total of 500 production runs for the upcoming year. What is the predetermined activity rate for the Production Setup activity?

  1. $160.00 per run
  2. $90.00 per run
  3. $170.00 per run
  4. $250.00 per run (correct answer)
Explanation: To find the activity rate, the total cost in the activity pool must first be calculated by summing its components. Then, this total cost is divided by the total quantity of the cost driver.
  1. Calculate Total Cost in the Pool:\n - Total Cost = Indirect Labor + Machine Depreciation = $80,000 + $45,000 = $125,000.
  2. Calculate the Activity Rate:\n - Activity Rate = Total Cost / Total Activity Driver = $125,000 / 500 production runs = $250.00 per run.

Question 3

A company uses activity-based costing and has determined the following rates: $50 per order for order processing and $5 per item for item handling. Customer X currently places 40 orders per year, with an average of 10 items per order, for a total of 400 items. To improve efficiency, Customer X proposes changing its ordering pattern to 10 larger orders, still for a total of 400 items. Assume revenues and cost of goods sold for Customer X remain unchanged.

If Customer X implements the proposed change in ordering pattern, what will be the impact on its annual customer profitability?

  1. An increase of $1,500 (correct answer)
  2. A decrease of $1,500
  3. An increase of $2,000
  4. No change
Explanation: The change in profitability is driven by the change in total activity costs, since revenue and COGS are constant.
  1. Calculate Current Activity Costs:\n - Order Processing = 40 orders * $50/order = $2,000.\n - Item Handling = 400 items * $5/item = $2,000.\n - Total Current Cost = $2,000 + $2,000 = $4,000.
  2. Calculate Proposed Activity Costs:\n - Order Processing = 10 orders * $50/order = $500.\n - Item Handling = 400 items * $5/item = $2,000.\n - Total Proposed Cost = $500 + $2,000 = $2,500.
  3. Calculate Impact on Profitability:\n - The cost decreases by $4,000 - $2,500 = $1,500.\n - A decrease in cost leads to an equal increase in profitability. Therefore, profitability increases by $1,500.

Question 4

FlexiCorp manufactures a product with a selling price of $200 and a cost of goods sold of $120. The company uses an activity-based costing system to allocate its $500,000 of selling and administrative (S&A) expenses. The primary S&A activity is customer support, driven by the number of service requests. The company processes 10,000 service requests annually. A major customer purchases 500 units and generates 150 service requests. What is the operating income generated by this customer?

  1. $40,000
  2. $32,500 (correct answer)
  3. $100,000
  4. $35,000
Explanation: This problem requires combining per-unit profit information with allocated activity-based costs.
  1. Calculate Gross Margin for the customer:\n - Revenue = 500 units * $200/unit = $100,000.\n - COGS = 500 units * $120/unit = $60,000.\n - Gross Margin = $100,000 - $60,000 = $40,000.
  2. Calculate the Activity Rate for S&A expenses:\n - Activity Rate = Total S&A Cost / Total Service Requests = $500,000 / 10,000 requests = $50 per request.
  3. Allocate S&A Cost to the customer:\n - Allocated Cost = 150 requests * $50/request = $7,500.
  4. Calculate Customer Operating Income:\n - Operating Income = Gross Margin - Allocated S&A Cost = $40,000 - $7,500 = $32,500.

Question 5

A consulting firm wants to estimate the profitability of a prospective client. The firm anticipates the client will generate $250,000 in annual revenue. The direct cost of services is estimated to be 60% of revenue. The firm's activity cost rates are $1,500 per client visit and $100 per support call. The firm expects this client will require 10 visits and 250 support calls annually. What is the estimated annual operating income for this new client?

  1. $100,000
  2. $75,000
  3. $60,000 (correct answer)
  4. $85,000
Explanation: This problem requires forecasting profitability by combining revenue/cost estimates with activity-based cost projections.
  1. Calculate Estimated Gross Margin:\n - Revenue = $250,000.\n - Direct Cost of Services = 60% * $250,000 = $150,000.\n - Gross Margin = $250,000 - $150,000 = $100,000.
  2. Calculate Estimated Activity Costs:\n - Client Visit Cost = 10 visits * $1,500/visit = $15,000.\n - Support Call Cost = 250 calls * $100/call = $25,000.\n - Total Activity Cost = $15,000 + $25,000 = $40,000.
  3. Estimate Annual Operating Income:\n - Operating Income = Gross Margin - Total Activity Cost = $100,000 - $40,000 = $60,000.

Question 6

Industrial Supplier Co. analyzed the profitability of Customer B. The analysis showed revenues of $400,000, cost of goods sold of $280,000, and total allocated activity-based costs of $80,000. What is the customer margin percentage for Customer B?

  1. 10.0% (correct answer)
  2. 30.0%
  3. 14.3%
  4. 20.0%
Explanation: The customer margin percentage is the customer's operating income divided by the customer's revenue.
  1. Calculate Gross Margin:\n - Gross Margin = Revenues - COGS = $400,000 - $280,000 = $120,000.
  2. Calculate Customer Operating Income (Customer Margin):\n - Customer Margin = Gross Margin - Allocated ABC Costs = $120,000 - $80,000 = 40,000.\n3.∗∗CalculateCustomerMarginPercentage:∗∗\n−Percentage=(CustomerMargin/Revenues)∗100=(40,000.\n3. **Calculate Customer Margin Percentage:**\n - Percentage = (Customer Margin / Revenues) * 100 = (40,000 / $400,000) * 100 = 10.0%.

Question 7

A company's ABC system has an activity for 'Custom Engineering Design' with a cost pool of $300,000. The cost driver is the number of engineering hours. Total engineering hours for the year were 2,500. Customer P required 80 hours of custom design and had a gross margin of $45,000 before accounting for this cost. After accurately allocating the custom design cost, what is the customer's revised margin?

  1. $35,400 (correct answer)
  2. $15,000
  3. $44,880
  4. $21,000
Explanation: This question asks for the margin after a specific activity cost is allocated. The term 'revised margin' here means the gross margin less this one specific customer-level cost.
  1. Calculate the Activity Rate:\n - Rate = Total Cost Pool / Total Driver Quantity = $300,000 / 2,500 hours = $120 per engineering hour.
  2. Calculate the Cost Allocated to Customer P:\n - Allocated Cost = Customer P's Driver Quantity * Rate = 80 hours * $120/hour = $9,600.
  3. Calculate the Revised Margin:\n - Revised Margin = Gross Margin - Allocated Cost = $45,000 - $9,600 = $35,400.

Question 8

Veridian Dynamics uses an ABC system to trace costs to customers. The cost to process a standard order is $30, while the cost to process a rush order is $110. One customer, Initech, placed 200 standard orders and 50 rush orders. This customer also required 10 on-site technical visits, which have an activity cost of $800 per visit. If Initech generated a gross margin of $25,000 for the period, what is its customer operating income?

  1. $25,000
  2. $11,000
  3. $5,500 (correct answer)
  4. A loss of ($500)
Explanation: To find the customer operating income, sum the costs from all activities related to the customer and subtract this total from the customer's gross margin.
  1. Calculate Standard Order Cost:\n - 200 standard orders * $30/order = $6,000.
  2. Calculate Rush Order Cost:\n - 50 rush orders * $110/order = $5,500.
  3. Calculate Technical Visit Cost:\n - 10 visits * $800/visit = $8,000.
  4. Calculate Total Allocated Costs:\n - Total Cost = $6,000 + $5,500 + $8,000 = $19,500.
  5. Calculate Customer Operating Income:\n - Income = Gross Margin - Total Allocated Costs = $25,000 - $19,500 = $5,500.

Question 9

TechWares Inc. uses activity-based costing. Its primary customer service activity is 'Technical Support,' driven by support hours. Initially, the cost pool was estimated at $200,000 with 4,000 total support hours. A specific customer, Compufix, used 200 hours and was initially determined to have an operating income of $34,000. Later, TechWares revised the Technical Support cost pool estimate to $280,000, while total support hours remained at 4,000. What is the revised operating income for Compufix?

  1. $37,000
  2. $32,500
  3. $43,000
  4. $30,000 (correct answer)
Explanation: This what-if analysis requires calculating the change in allocated cost due to the revised estimate and applying it to the initial profitability.
  1. Calculate Initial Activity Rate and Allocated Cost:
    • Initial Rate = $200,000 / 4,000 hours = $50 per hour.
    • Initial Allocated Cost = 200 hours * $50/hour = $10,000.
  2. Calculate Revised Activity Rate and Allocated Cost:
    • Revised Rate = $280,000 / 4,000 hours = $70 per hour.
    • Revised Allocated Cost = 200 hours * $70/hour = $14,000.
  3. Calculate the Change in Allocated Cost:
    • Increase in Cost = $14,000 - $10,000 = $4,000.
  4. Calculate Revised Operating Income:
    • Revised Income = Initial Income - Increase in Cost = $34,000 - $4,000 = $30,000.

Question 10

PharmaSupply Corp. tracks costs related to expedited shipments, as these are a significant driver of customer service expenses. The expedited shipments cost pool for the year is $180,000. In total, the company processed 750 expedited shipments. One of its key customers, MedCenter, requested 60 of these shipments. Using an activity-based costing approach, what is the total cost for expedited shipments allocated to MedCenter?

  1. $240
  2. $14,400 (correct answer)
  3. $18,000
  4. $3,000
Explanation: The solution requires calculating the cost driver rate per expedited shipment and then applying that rate to the customer's activity.
  1. Calculate Cost Driver Rate: The cost driver is the number of expedited shipments. The rate is the total cost pool divided by the total driver quantity: $180,000 / 750 shipments = $240 per shipment.
  2. Allocate Cost to MedCenter: Multiply the rate by the number of shipments for MedCenter: $240/shipment * 60 shipments = $14,400.

Question 11

RetailerCorp has a customer, Boutique Z, that generates an annual gross margin of $40,000. Servicing this customer requires two types of activities: sales visits, which are considered a fixed customer-level cost for the year, and order processing, which varies with the number of orders. The annual cost for sales visits for Boutique Z is $4,000. The activity rate for order processing is $120 per order. What is the maximum number of orders Boutique Z can place in a year before it becomes unprofitable?

  1. 333 orders
  2. 800 orders
  3. 300 orders (correct answer)
  4. 40 orders
Explanation: To find the breakeven point in terms of orders, we must determine how much margin is available to cover the variable per-order costs, after accounting for fixed customer-level costs.
  1. Calculate Margin Available for Variable Costs:\n - Start with the total gross margin: $40,000.\n - Subtract the fixed customer-level costs (sales visits): $40,000 - $4,000 = $36,000.\n - This $36,000 is the maximum amount of order processing costs the customer can incur before becoming unprofitable.
  2. Calculate Maximum Number of Orders:\n - Divide the available margin by the cost per order: $36,000 / $120 per order = 300 orders.\n - At 300 orders, the customer's operating income is exactly zero. Any more orders would result in a loss.