Question

Venus Creations sells window treatments (shades, blinds, and awnings) to both commercial and residential customers. The following information relates to its budgeted operations for the current year.

		Commercial				Residential
Revenues				$298,800				$475,000
Direct materials costs		$30,000				$50,000
Direct labor costs		118,300				312,500
Overhead costs		94,100		242,400		150,000		512,500
Operating income (loss)				$56,400				$(37,500)

The controller, Peggy Kingman, is concerned about the residential product line. She cannot understand why this line is not more profitable given that the installations of window coverings are less complex for residential customers. In addition, the residential client base resides in close proximity to the company office, so travel costs are not as expensive on a per client visit for residential customers. As a result, she has decided to take a closer look at the overhead costs assigned to the two product lines to determine whether a more accurate product costing model can be developed. Here are the three activity cost pools and related information she developed:

Activity Cost Pools		Estimated Overhead				Cost Drivers
Scheduling and travel			$98,000			Hours of travel
Setup time			88,100			Number of setups
Supervision			58,000			Direct labor cost

Expected Use of Cost Drivers per Product
		Commercial				Residential
Scheduling and travel			950				530
Setup time			430				250

Compute the activity-based overhead rates for each of the three cost pools. (Round answers to 2 decimal places, e.g. 12.25.)

		Overhead Rates
Scheduling and travel		$
Setup time		$
Supervision			%

eTextbook and Media

Partially correct answer iconYour answer is partially correct.

Determine the overhead cost assigned to each product line. (Round answers to 0 decimal places, e.g. 1,575.)

		Commercial		Residential
Scheduling and travel		$		$
Setup time		$		$
Supervision		$		$
Total cost assigned		$		$

eTextbook and Media

Incorrect answer iconYour answer is incorrect.

Compute the operating income for each product line, using the activity-based overhead rates. (Round answers to 0 decimal places, e.g. 1,575.)

		Operating income (loss)
Commercial		$
Residential		$

Answer 1

Solution 1&2:

Allocation of overhead using Activity Based Costing
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Commercial		Residential
					Usage	Allocated Costs	Usage	Allocated Costs
Scheduling and Travel	$98,000.00	Hours of Travel	1480	$66.22	950	$62,905	530	$35,095
Setup Time	$88,100.00	Nos of Setups	680	$129.56	430	$55,710	250	$32,390
Supervision	$58,000.00	Direct labor cost	430800	13.46%	118300	$15,927	312500	$42,073
Total	$244,100.00					$134,543		$109,557

Solution 3:

Computation of Operating Income of each Product Line - Using ABC
Particulars	Commercial	Residential
Revenues	$298,800	$475,000
Expenses:
Direct material cost	$30,000	$50,000
Direct labor cost	$118,300	$312,500
Manufacturing overhead Cost	$134,543	$109,557
Operating Income	$15,957	$2,943