Question

In: Accounting

Marigold Creations sells window treatments (shades, blinds, and awnings) to both commercial and residential customers. The...

Marigold 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

$328,000 $514,000

Direct materials costs

$45,000 $50,000

Direct labor costs

110,000 290,000

Overhead costs

108,000 263,000 199,000 539,000

Operating income (loss)

$65,000 $(25,000)


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

$108,000 Hours of travel

Setup time

119,000 Number of setups

Supervision

80,000 Direct labor cost
Estimated Use of Cost Drivers per Product

Commercial

Residential

Scheduling and travel

800 550

Setup time

450 250

(a1)

Compute the activity-based overhead rates for each of the three cost pools. (Round overhead rate for supervision to 2 decimal places, e.g. 0.38.)

Overhead Rates

Scheduling and travel

$

per hour
Setup time

$

per setup
Supervision

$

per dollar

Find The total overhead cost assigned to commercial and Residential

Find The operating income for commercial and residential

Solutions

Expert Solution

(a1)

Overhead Rates
Scheduling and travel $                80 per hour
Setup time $              170 per setup
Supervision $            0.20 per dollar

Working:

Scheduling and travel: $108000/(800 + 550) = $108000/1350 = $80
Setup time: $119000/(450 + 250) = $119000/700 = $170
Supervision: $80000/($110000 + $290000) = $80000/$400000 = $0.20
Activity Cost Pool Activity Rate Commercial Residential
Cost Driver Usage Overhead Cost Assigned Cost Driver Usage Overhead Cost Assigned
Scheduling and travel 80 800 64000 550 44000
Setup time 170 450 76500 250 42500
Supervision 0.20 110000 22000 290000 58000
Total overhead cost assigned $ 162500 144500
Commercial Residential
Revenues 328000 514000
Direct materials costs 45000 50000
Direct labor costs 110000 290000
Overhead costs 162500 317500 144500 484500
Operating income (loss) 10500 29500

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