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				$331,000				$456,000
Direct materials costs		$30,000				$50,000
Direct labor costs		140,000				260,000
Overhead costs		91,000		261,000		176,000		486,000
Operating income (loss)				$70,000				$(30,000)

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			$91,000			Hours of travel
Setup time			96,000			Number of setups
Supervision			80,000			Direct labor cost

Estimated Use of Cost Drivers per Product
		Commercial				Residential
Scheduling and travel			750				550
Setup time			550				250

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.)

Answer 1

Solution: Calculation of Activity based Overhead Rates Activity cost pool Estimated Cost Drivers Commercial Residential Total Cost Drivers ABC rate Scheduling and travel $ 91,000 Hours of travel 550 1300 $ 70.00 Setup time $ 96,000 Number of setup 550 250 800 $ 120.00 Supervision $ 80,000 Direct labor cost $ 1,40,000 $ 2,60,000 400000 $ 0.20 750 Kindly Comment down for any further clarifications/ queries and please upvote.