Question

Elite Lawn & Plowing (EL&P) is a lawn and snow plowing service with both residential and commercial clients. The owner believes that the commercial sector has more growth opportunities and is considering dropping the residential service.

Twenty employees worked a total of 46,000 hours last year, 29,000 on residential jobs and 17,000 on commercial jobs. Wages were $13 per hour for all work done. Any materials used are included in overhead as supplies. All overhead is allocated on the basis of labor-hours worked, which is also the basis for customer charges. Because of increased competition for commercial accounts, EL&P can charge $38 per hour for residential work, but only $28 per hour for commercial work.

Required:

a. If overhead for the year was $137,180, what were the profits of the residential and commercial services using labor-hours as the allocation base? (Do not round intermediate calculations. Round final answers to the nearest whole dollar.)
b. Overhead consists of costs of traveling to the site, using equipment (including vehicle rental), and using supplies, which can be traced as follows.

					Cost Driver Volume
Activity	Cost Driver	Cost			Commercial			Residential
Traveling	Number of clients served	$	15,660			18			40
Using equipment	Equipment hours		37,520			3,200			2,400
Using supplies	Area serviced in square yards		84,000			140,000			70,000
Total overhead		$	137,180

Recalculate profits for commercial and residential services based on these activity bases. (Do not round intermediate calculations. Round final answers to the nearest whole dollar.)

Answer 1

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Elite Lawn & Plowing (EL&P)
Workings for answer a	Amount $	Note
Actual Overhead	137,180.00	A
Direct labor hours	46,000.00	B
Overhead allocation rate	2.98	C=A/B
Workings for answer a	Residential	Commercial	Note
Actual labor hours	29,000.00	17,000.00	D
Labor rate	13.00	13.00	E
Direct labor cost	377,000.00	221,000.00	F=D*E
Overhead allocation rate	2.98	2.98	See C
Overhead allocated	86,483.00	50,697.00	G=C*D
Service rate	38.00	28.00	H
Service revenue	1,102,000.00	476,000.00	I=H*D
Answer a	Residential	Commercial
Service revenue	1,102,000.00	476,000.00	See I
Less: Direct labor cost	377,000.00	221,000.00	See F
Less: Overhead allocated	86,483.00	50,697.00	See G
Profits from the job	638,517.00	204,303.00

Workings for answer b		J	K	L	M=K+L	N=J/M
Calculation of ABC rates for overhead			Activity usage
Activity cost pool	Activity Measure	Cost	Residential	Commercial	Total	ABC rates
Traveling	Number of clients served	15,660.00	18.00	40.00	58.00	270.00
Using equipment	Equipment Hours	37,520.00	3,200.00	2,400.00	5,600.00	6.70
Using supplies	Area serviced in square yards	84,000.00	140,000.00	70,000.00	210,000.00	0.40
Total Overhead Cost		137,180.00
Allocation table		See N	See K	O=N*K	See L	P=N*L
			Residential		Commercial
Activity cost pool	Activity Measure	ABC Rates	Activity used	Cost assigned	Activity used	Cost assigned
Traveling	Number of clients served	270.00	18.00	4,860.00	40.00	10,800.00
Using equipment	Equipment Hours	6.70	3,200.00	21,440.00	2,400.00	16,080.00
Using supplies	Area serviced in square yards	0.40	140,000.00	56,000.00	70,000.00	28,000.00
Total Cost assigned				82,300.00		54,880.00
Answer b	Residential	Commercial
Service revenue	1,102,000.00	476,000.00
Less: Direct labor cost	377,000.00	221,000.00
Less: Overhead allocated	82,300.00	54,880.00
Profits from the job	642,700.00	200,120.00