Shady Lady sells window coverings to both commercial and residential customers.

Question

Shady Lady sells window coverings 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 material 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 $105,000 Hours of travel
Setup time 70,000 Number of setups
Supervision 60,000 Direct labor cost

Expected Use of Cost Drivers per Product
Commercial
Residential
Scheduling and travel 1,000 500
Setup time 450 250




(a1)

Compute the activity-based overhead rates for each of the three cost pools. (Round answers to 2 decimal places, e.g. $12.25.)

Overhead Rate
Scheduling and travel
$
Setup time
$
Supervision
$

Explanation / Answer

Compute the activity-based overhead rates for each of the three cost pools. (Round answers to 2 decimal places, e.g. $12.25.) Overhead Rate Scheduling and travel $105,000/(1,000 hours + 500 hours) = $70 per hour of travlel answr: $70 per hour of travel Setup time $70,000/(450 setups + 250 setups) = $100 per setup answer: $100 per setup Supervision $60,000/($100,000 +$300,000) = $0.15 per direct labor dollar answer: $0.15 per direct labor dollar

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