Venus Creations sells window treatments (shades, blinds, and awnings) to both co

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

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

Commercial

Residential

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.

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)

Explanation / Answer

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

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