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				$322,500				$537,500
Direct materials costs		$35,000				$50,000
Direct labor costs		120,000				280,000
Overhead costs		87,500		242,500		232,500		562,500
Operating income (loss)				$80,000				$(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			$87,500			Hours of travel
Setup time			112,500			Number of setups
Supervision			120,000			Direct labor cost

Estimated Use of Cost Drivers per Product
		Commercial				Residential
Scheduling and travel			750				500
Setup time			500				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		$enter a dollar amount per dollar rounded to 2 decimal places	per dollar
Setup time		$enter a dollar amount per setup rounded to 2 decimal places	per setup
Supervision		$enter a dollar amount per dollar rounded to 2 decimal places	per dollar

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(a2)

Determine the overhead cost assigned to each product line.

		Commercial		Residential
Scheduling and travel		$enter a dollar amount		$enter a dollar amount
Setup time		$enter a dollar amount		$enter a dollar amount
Supervision		$enter a dollar amount		$enter a dollar amount
Total cost assigned		$enter a total dollar amount		$enter a total dollar amount

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(b)

Compute the operating income for each product line, using the activity-based overhead rates.

		Operating income (loss)
Commercial		$enter a dollar amount
Residential		$enter a dollar amount

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Answer 1

(a1) Computation of  the activity-based overhead rates for each of the three cost pools.

Activity cost pools	Estimated Overhead	Expected use of costdrivers	Activity Based Overheadrates	Unit
Scheduling and travel	87,500	1,250	70.00	Per hours of travel
		(750+500)
Setup time	1,12,500	750	150.00	Per setups
		(500+250)
Supervision	1,20,000	4,00,000	0.30	Per direct labor cost
		(120,000+280,000)

(a2) : Overhead cost assigned to each product:

Overhead cost	Commercial	Residential
Scheduling and travel	52,500	35,000
	(750*70)	(500*70)
Setup time	75,000	37,500
	(150*500)	(150*250)
Supervision	36,000	84,000
	(0.30*120000)	(0.30*280000)
Total overhead cost	1,63,500	1,56,500

(b) Calculation of  the operating income for each product line, using the activity-based overhead rates.

Particulars	Commercial		Residential
Revenues		3,22,500		5,37,500
Less: Operating expenses
Direct materials costs	35,000		50,000
Direct labor costs	1,20,000		2,80,000
Overhead costs	1,63,500	3,18,500	1,56,500	4,86,500
Operating income		4,000		51,000