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 Revenues $319,300 Residential $472,500 $50,000 $45,000 120,000 280,000 Direct materials costs Direct labor costs Overhead costs Operating income (loss) 79,300 244,300 167,500 497,500 $75,000 $(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

Answer 1

Cost per activity: Total (Activity Overhead Activity Activity cost Commercial Residential Base) rates Scheduling & Travel $ 79,300 750 550 1300 $ 61.00 per dollar Setup time $ 1,27,500 500 250 750 $ 170.00 per setup Supervision $ 40,000 120000 280000 400000 $ 0.10 per dollar Overhead Activity rates Scheduling & Travel $ 61.00 per dollar Setup time $ 170.00 per setup Supervision $ 0.10 per dollar Commercial Allocation of Activity costs: Cost per Activity activity (A) Scheduling & Travel $ 61.00 Setup time $ 170.00 Supervision $ 0.10 Activity Base (B) 750 500 120000 Product (A x B) $ 45,750 $ 85,000 $ 12,000 $ 1,42,750 Residential Activity Base Product (C) (A x C) 550 $ 33,550 250 $ 42,500 280000 $ 28,000 $1,04,050 Activity Commercial Residential Scheduling & Travel $ 45,750 $ 33,550 Setup time $ 85,000 $ 42,500 Supervision 12,000 $ 28,000 Total cost assigned $ 1,42,750 $ 1,04,050 $ Computation of Operating Income / (Loss) Commercial Residential Revenues $ 3,19,300 $ 4,72,500 less: Direct Material costs $ 45,000 $ 50,000 less: Direct Labor costs $ 1,20,000 $ 2,80,000 less: Overhead costs $ 1,42,750 $ 1,04,050 Operating Income (Loss) $ 11,550 $ 38,450 Operating Income (loss) Commercial $ 11,550 Residential $ 38,450

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