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				$355,050				$425,000
Direct materials costs		$30,000				$50,000
Direct labor costs		150,000				250,000
Overhead costs		85,050		265,050		145,000		445,000
Operating income (loss)				$90,000				$(20,000)

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			$85,050			Hours of travel
Setup time			105,000			Number of setups
Supervision			40,000			Direct labor cost

Expected Use of Cost Drivers per Product
		Commercial				Residential
Scheduling and travel			800				550
Setup time			500				250

1. Compute the activity-based overhead rates for each of the three cost pools

2. Determine the overhead cost assigned to each product line.

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

Answer 1

1	Activity based overhead rates=Estimated overhead/Total expected use of cost drivers
	Activity cost pools			Estimated Overhead	Expected use of cost drivers	Activity based overhead rates
	Scheduling and travel			85050	1350	63	Per hours of travel
					(800+550)
	Setup time			105000	750	140	Per setups
					(500+250)
	Supervision			40000	400000	0.1	Per direct labor cost
					(150000+250000)
2	Overhead cost assigned to each product:
	Overhead cost			Commercial	Residential
	Scheduling and travel			50400	34650
				(800*63)	(550*63)
	Setup time			70000	35000
				(140*500)	(140*250)
	Supervision			15000	25000
				(0.1*150000)	(0.1*250000)
	Total overhead cost			135400	94650
3
				Commercial		Residential
	Revenues				355050		425000
	Less: Operating expenses
	Direct materials costs			30000		50000
	Direct labor costs			150000		250000
	Overhead costs			135400	315400	94650	394650
	Operating income				39650		30350