ACC560 Week 3 Homework: Ch E4-14 Venus Creations commercial and residential cuss

Question

ACC560 Week 3 Homework: Ch E4-14 Venus Creations commercial and residential cussomews. The follewing information relates to its ded operations for the curent year Commercial Revenues Direct materials costs 30,000 Direct labor costs Overhead costs Residential 5 300,000 1 50,000 4 100,000 85,000215.000 $ 85 000 300,000 150.000 5000 Operating income (loss) S 20,000) The controller, Peggy Kingman, is concened ahout the residential peobuct line. She cannot understand why this line is not more profnable given that the installations ol 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 resalt, she has decided to take a closer look at the ovwerhead costs assigned to the two product lines to deternmine whether a more accurate product costing model can be developed. Here are the three activity cost pools and related information she developed Cost Drivers Estimated Overhead Activity Cost Pools Scheduling and travel Setup time Supervision 85,000 90,000 60,000 Hours of travel Number of sctups Direct labor co Expected Use of Cost Drivers per Product Commercial 750 350 Resideatial 500 250 Scheduling and travel Sctup time Instructions (a) Compute the activity-based overhead rates for each of the three cost pools, and deter- (b) Compute the operating income for each product line, using the activity-hased ower- (c) What do you believe Peggy Kingman should do? mine the overhead cost assigned to cach product line. head rates.

Explanation / Answer

Answer a. ABC Costing Activity Overhead Cost Driver Quantity Allocation Rate Scheduling and travel                  85,000                        1,250 hours of travel                        68.00 per travel hr Setup Time                  90,000                            600 no. of setups                      150.00 per setup Supervision                  60,000                   400,000 Direct labor costs                           0.15 per DL $ Total                235,000 Assigning Overhead Cost to Product Model Using ABC Method Activity Based Overhead Rate Commercial Residential Cost Driver Incurred OH Allocated Cost Driver Incurred OH Allocated Scheduling and travel                    68.00 per travel hr                             750 hours of travel                   51,000            500 hours of travel                34,000 Setup Time                  150.00 per setup                             350 no. of setups                   52,500            250 no. of setups                37,500 Supervision                       0.15 per DL $                     100,000 Direct labor costs                   15,000    300,000 Direct labor costs                45,000 Total Overhead Cost                 118,500              116,500 Answer b. Commercial Residential Revenues                   300,000 480000 Direct Material                  30,000 50000 Direct Labor                100,000 300000 Ovrehead Costs                118,500                   248,500                     116,500                    466,500 Net Operating Income                      51,500                      13,500 Answer c. Peggy Kingman should present his calculations in fron of the Management and tells them to Switch to ABC costing.

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