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 $300,000 $480,000
Direct materials costs $30,000 $50,000
Direct labor costs 100,000 300,000
Overhead costs 85,000 215,000 150,000 500,000
Operating income (loss) $85,000 $(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 $85,000 Hours of travel
Setup time 90,000 Number of setups
Supervision 60,000 Direct labor cost
Expected Use of Cost Drivers per Product
Commercial Residential
Scheduling and travel 750 500
Setup time 350 250
Required:
1. Compute the activity-based overhead rates for each of the three cost pools.
Overhead Rates
Scheduling and travel
Setup time
Supervision
2. Determine the overhead cost assigned to each product line.
Commercial Residential
Scheduling and travel
Setup time
Supervision
Total cost assigned
3. Compute the operating income for each product line, using the activity-based overhead rates.
Operating income (loss)
Commercial
Residential

Answer 1

Answer and Explanation:

The computation is shown below:

1. For activity-based overhead rates

                               a                              b                         (a ÷b)

Particulars             Overhead         Total Activities       Overhead Rates

Scheduling

and Travel              85000                    1250                    $68

                                                      (700 + 500)

Setup time              90000                    600                     $150

                                                      (350 + 250)

Supervision            60000                   400000                $0.15

                                                    ($100,000 + $300,000)

b. For overhead cost assigned

                                            (In dollars)

Particulars                        Commercial                  Residential

Scheduling and Travel     51000                              34000

                                   ($68 × 750)                              ($68 × 750)

Setup time                        52500                              37500

                                      ($150 × 350)                           ($150 × 250)

Supervision                      15000                                45000

                             ($100,000 × 0.15)                       ($300,000 × 0.15)

Total Cost Assigned   118500                              116500

3. For operating income

Particulars                        Commercial                     Residential

                                                      (In dollars)

Revenue                             300000                          480000

Less DM                              30000                            50000

Less DL                               100000                           300000

Less Overhead Cost           118500                            116500

Operating Income               51500                               13500

We simply applied the above format