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				$299,000				$475,000
Direct materials costs		$30,000				$49,000
Direct labor costs		109,900				296,500
Overhead costs		93,900		233,800		149,000		494,500
Operating income (loss)				$65,200				$(19,500)

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			$94,000			Hours of travel
Setup time			98,400			Number of setups
Supervision			50,500			Direct labor cost

Expected Use of Cost Drivers per Product
		Commercial				Residential
Scheduling and travel			850				590
Setup time			440				290

Part 1

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			%

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Part 2

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

Part 3

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

1)Activity rate = Estimated activity overhead /Estimated activity base

Activity	Activity cost	/	Activity base	=	Activity rate
Scheduling and travel	94000		850+590=1440		65.28 per Hours of travel
Setup time	98400		440+290=730		134.79 per Number of setups
Supervision	50500		109900+296500=406400		12.43% of direct labor cost

2)

Overhead assigned to Product line =Activity usage * Activity rate

	COMMERCIAL					Residential
Activity	Activity usage	*	Activity rate	=	Assigned overhead	Activity usage	*	Activity rate	=	Assigned overhead
Scheduling and travel	850		65.28 per Hours of travel		55488	590		65.28 per Hours of travel		38515
Setup time	440		134.79 per Number of setups		59308	290		134.79 per Number of setups		39089
Supervision	109900		12.43% of direct labor cost		13661	296500		12.43% of direct labor cost		36855
Total cost assigned					128457					114459

3)

	commercial		residential
Revenue		299000		475000
Direct materials costs	30000		49000
Direct labor cost	109900		296500
Overhead	128457	(268357)	114459	(459959)
Operating income /(loss)		30643		15041