Exercise 17-14 (Part Level Submission) Commercial Residential Activity Cost Pool

Question

Exercise 17-14 (Part Level Submission)

Commercial

Residential

Activity Cost Pools

Estimated Overhead

Cost Drivers

Commercial

Residential

(a1)

Overhead Rates

Exercise 17-14 (Part Level Submission)

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 $298,500 $483,000 Direct materials costs $30,000 $51,000 Direct labor costs 110,600 305,500 Overhead costs 81,800 222,400 151,000 507,500 Operating income (loss) $76,100 $(24,500)
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 $90,000 Hours of travel Setup time 68,800 Number of setups Supervision 74,000 Direct labor cost Expected Use of Cost Drivers per Product

Commercial

Residential

Scheduling and travel 860 580 Setup time 380 220

Explanation / Answer

Overhead Rates Scheduling and travel 62.5 =90000/(860+580) Setup time 114.67 =68800/(380+220) Supervision 17.78% =74000/(110600+305500)

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